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Greek Fixed Income Monitor - March 2017

A Comeback to Corporate Bond Issues Despite Increased Uncertainty

In March, increased pressure was observed regarding the second Greek programme review, especially in view of the forthcoming repayment of bonds worth €7.4 billion in July. Specifically, except from the Eurogroup on 7th April, in which the chances of closing the evaluation are small, the Greek government is left with the Eurogroup on 22 May and 15 June. Furthermore, an equally important date is 21 April where the Spring Meeting of the International Monetary Fund is scheduled to take place and is expected that there will be some guidance on the direction of the Greek debt medium-term measures. In this highly uncertain environment, the Greek Government Bond Index recorded an increase of 3.04% in March compared to the previous month. The Index was mainly strengthened over the last week of March, reaching 423.68 points after the European Commission's assessment stating that the Greek primary surplus in 2016 ranged between 1.5-2.5 percentage points above the target for the Greek programme.

A direct consequence of the positive assessments for the Greek bond market was the average yield to maturity of the Index from 7.65% to 7.24% at the end of February. Conversely, government bond valuations do not seem to discount the worsening climate of the Greek economy as recorded by the PMI index and the challenging environment on international bond markets. Specifically, the PMI index deteriorated for the seventh consecutive month in March, falling at 46.7 points, while the implementation of the ECB decision to further decrease its monthly bond purchases puts pressure on bond yields in the European periphery.

Risk premiums on government bonds recorded a positive sentiment with the 5-year CDS, falling below the 1000 bps level during March. The moderate improvement of the credit risk spread is consistent with the decline in government bond yields and signals that the market anticipates that the review process will be concluded in the Eurogroup of June at the latest, notwithstanding the high uncertainty lingering in the interim. However, the estimate of the average yield of Government Bond Index according to the "fair" valuation model of Piraeus Bank lies at 7.86%, overvalued by about 62 basis points compared to the actual performance in late March. In addition, high uncertainty remains a significant risk for bond returns in case of a deadlock in the discussions.

Despite delays in the Greek programme review and the worsening liquidity conditions in the Greek economy, positive dynamics were also observed with regard to the Corporate Bond Index., which increased by 0.6% reaching 127.6 points in late March.

The expectations for the export sector recorded a slight improvement, with the Economic Sentiment Index recording a marginal increase 0.5 points compared to February and reaching 93.4 points. However, the improved outlook for exports was offset by the deterioration of consumer confidence due to increasing pressures on household disposable income, which is expected to affect domestic demand.

The low liquidity in the economy led the business sector to shift from bank loans to other forms of financing such as corporate bond issues. This trend is confirmed by the successful bond issue by OPAP worth €200 million with a coupon of 3.5%, which was oversubscribed by 2.1 times. More importantly, similar actions of corporate debt securities issuance through public offering to investors are expected to continue by other business groups. The new bond issue of €350 million by Motor Oil with a coupon of 3.25% in early April, confirms this trend.