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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Thursday, January 28, 2010

Rumours, Rumours, But No Greek Bond Sales To China

Well there certainly is a lot happening out there at the moment. And Monday's successful bond sale which left the Greek government triumphally proclaiming they could comfortably meet their 2010 borrowing program now seems to belong to a lifetime ago. The sale raised 8 billion euros over a 5-year syndicated bond which attracted total bids of EUR25 billion, well above the EUR 3 billion to EUR5 billion initially targeted by the government, who immediately declared a major victory.

That was before yesterday, and the Financial Times announcement that Athens was wooing Beijing to buy up to €25bn of government bonds in a deal being negotiated using Goldman Sachs as intermediary. China had not agreed to such a purchase, according to the FT at the time. In the wake of this announcement - as the FT put it - "Greece’s debt crisis returned to financial markets with a vengeance as agitated investors demanded the highest premiums to buy its government bonds since the launch of European monetary union over a decade ago".

In fact, the yield spread between 10-year Greek bonds and benchmark German Bunds widened dramatically, and were up by almost 0.7 percentage points at one stage, as a general panic set in among sellers who were rattled by doubts about Greece’s ability to refinance its debt - or their willingness to make the reforms which would make their debt sustainable in the longer term. If they were so keen to make all the necessary changes, why were they talking to the Chinese, and not the ECB and the EU Commission, who can, of course, easily guarantee funding for such a small quantity of money?

But the biggest impetus to the debacle actually came not from the FT announcement itself, but from the Greek government's clumsy attempts to deny they had asked for help from Goldman Sachs in order to sell government debt to China. In the end Greek 10-year bond yields closed at 6.70 per cent, up 0.48 percentage points up on the day. In fact, the lid was virtually sealed on the Greek fate by statements reported in Bloomberg from Yu Yongding, a former adviser to the Chinese central bank, who is quoted as saying that China shouldn’t buy a “large chunk” of Greek government debt to help rescue the country because their securities "are more risky than U.S. Treasuries". “Let European governments and the European Central Bank rescue Greece", he said. Exactly. This is the point.

The Greek finance ministry reacted by coming out with an attempt to deny that any such negotiations were taking place: "The Finance Ministry categorically denies that there is any deal to sell Greek bonds to China.......The Finance Ministry has not mandated Goldman Sachs to negotiate any deal with China." Fine, but wording here is important. Evidently there is no deal, and Goldman Sachs were given no "mandate" - but that doesn't mean they weren't in Beijing, negotiating on Greece's behalf. In fact, as the FT notes, this issue has a relatively long historyand goes back to at least last autumn:

Greece’s attempt to attract Chinese investors to buy a slice of its sovereign debt took shape last November at a lunch attended by George Papandreou, the prime minister, and Gary Cohn, chief operating officer of Goldman Sachs, the US investment bank. Faced by a soaring budget deficit and record public debt, the newly installed socialist government was eager for ideas about how to finance this year’s €55bn ($77.5bn, £48bn) borrowing requirement, the FT has learnt.

Goldman was keen to promote a Greek bond sale to the Chinese government and the State Administration of Foreign Exchange, which manages the country’s foreign exchange reserves – increasing at a rate of $50bn (€35bn, £31bn) monthly in recent months.

Goldman Sachs has close involvement with the struggling Greek government. The investment bank – along with Deutsche Bank – last month organised the government’s first roadshow to London, led by George Papaconstantinou, the finance minister. It was also one of four foreign banks – the others were Deutsche Bank, Credit Suisse and Morgan Stanley – that arranged Monday’s successful bond offering, along with two Greek banks.

The Greek press has long been rife with speculation about possible Chinese investments in the country, and some of the earliest stories go back to 2008, when Chinese port operator Cosco Pacific signed a 3.4 billion euro deal to run and upgrade facilities at Piraeus Port, which is Greece's biggest, although none of the deals mentioned ever fully materialised, since the Chinese have been unable to operationalise their Piraeus asset following a dockworkers strike last October which lead all concerned to have second thoughts.

This time the rumour mill had it that the Greek government were willing to cede some control over one of their strategic assets - National Bank of Greece - in return for the funding. Analysts in Athens saw the government’s appointment of Vassilis Constantacopoulos, a senior Greek shipowner, as a non-executive director of NBG earlier this month as a signal that a deal with a Chinese investor might be in the offing. Mr Constantacopoulos’s shipping company charters container vessels to China’s Cosco shipping and ports group, and it was he who facilitated the above mentioned €4bn concession for Cosco to operate a container terminal at Piraeus port.

The Greek Prime Minister George Papandreou has vigourously denied all these reports - although again, watch the wording. Speaking at Davos today he said that recent media reports that China would buy up to E25 billion worth of Greek sovereign bonds are "wrong," and that Greece has "not asked for money anywhere else." He added: "We are in a jittery time" in which "rumors can create problems." Greece's Finance Minister George Papaconstantinou also reiterated the same points: "We have not talked to China and no investment bank has a mandate from us to talk to China," he said in an interview with The Wall Street Journal.

But it is strange to here Mr Papconstantinou saying this, since if we go back just to last Tuesday - the day before the current rumpus broke out - Mr Papaconstantinou gave an earlier interview to the Wall Street Journal, but this time the Greek Finance Minister was there to detail a diversified global borrowing plan to plug government fiscal gaps - including, he mentioed, aspirations to raise up to $10 billion from Chinese and other Asian investors.
Papaconstantinou will lead a delegation next month to the U.S. and Asia to market Greek debt valued at at least $1.5 billion to $2 billion denominated in euros, dollars and possibly yen. But Greek officials hope that the bond tour, which will include stops in Beijing, Shanghai and Hong Kong, could bring in five times that amount if Chinese investors are attracted to the deal. "There is a lot of liquidity in China. There are big funds in China. This is why China is going to be part of the road show," he said, adding that if Chinese investors are to get involved the bond size has to be "significant... possibly $5 billion to $10 billion." A person familiar with the situation has told Dow Jones that Greece is trying to place as much as EUR20 billion to EUR25 billion overall with Chinese investors.

Indeed the Greek government have not gone so far as to deny the roadshow ever exitsed, but Reuters today do report that they have backtracked somewhat, since while they had previously announced they were going to stage the roadshow sometime in the near future, the head of the Greek debt agency (PDMA) is now stressing that no date has in fact yet been set: "Finance ministry officials said the roadshow might take place at the end of February or in March, depending on Greece's borrowing plan, which has not been finalised."

Really, this is all a very, very sorry story, and the main issue facing the Greek authorities at this point is one of credibility since, as the Financial Times says: "at the heart of Greece’s problems is a lack of confidence in its trustworthiness". Such confidence has been lost in the course of a decade of "incidents" with the EU Commission and the Eurostat statistics office, and it is just this loss of confidence which the recent handling by the Greek administration of the China bond issue will have done little to restore. Is the Greek government batting with us or against us at this point?

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