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Greek Fixed Income Monitor: Negative Momentum At The End Of 2015_ January 2016

  • The Piraeus Bank Government Bond Index made significant annual gains of 24% in end-2015, mainly due to the upward movement that occurred after the signing of the 3rd Economic Policy Program in August 2015. However, during the last quarter of 2015, the index exhibited negative momentum resulting in a 3% fall in December relative to the previous month.
  • In that respect, the big question that needs to be answered is “Why did 2015 turn out much better than anybody anticipated?” especially given the massive self-imposed shock of “bank holidays” and “capital controls”.
  • In contrast to the profits (1.76%) recorded by the European Corporate Bond Index calculated by Bloomberg, the Greek Corporate Bond Index ended December 2% lower than at the beginning of the year. Specifically, in December the Corporate Bond Index was strongly influenced by the negative moves of Public Power Corporation (PPC) bonds. Negative reports on the announced results of the PPC, that are associated with €2 bn arrears as well as developments related to the compensation of the PPC from the sale of ADMIE led to a 2.3% drop in the PPC bond maturing at the end of 2017 and a 7.9% drop for the bond with maturity in 2019. Since the weights of the two PPC bonds in our index are 3% and 7.5% respectively, their decline contributed to the sharp monthly loss of the index of 5.5%.
  • During 2016, the main developments that are expected to significantly affect bond yields are:

    1. Successful completion of the first evaluation of the new program in the next two months, but most importantly its outcome regarding the progress of restructuring the real economy, the management of Non Performing Loans (NPL) and the promotion of privatization-friendly policies.
    2. Restoration of the waiver for Greek bonds by the ECB and possibly the integration of Greek bonds into the quantitative easing program (QE).
    3. An upgrade in the credit ratings of Greek fixed income securities from the credit rating agencies.
    4. Recovery in domestic demand through tourism, the removal of capital restrictions and developments in the international economy (falling oil prices, further monetary easing in the Eurozone).            
  • 2016 is expected to be a difficult year for high yield corporate bonds as we expect a worldwide decline in corporate profitability in an environment of sluggish growth, low inflation and high volatility. However a deterioration of “the Greek" risk premium embedded in the yields of Greek fixed income securities could boost the outlook of the Greek bond market.