* Greek mulling five-year bond sale in next three months
* Athens on the verge of a faster-than-average market
* Greek market return would boost investor confidence
* Costs high, but Greece hopes to add momentum to the rally
By Marius Zaharia
LONDON, April 1 Greece could be on the verge of
making one of the fastest market comebacks of a defaulted
sovereign ever recorded.
To the surprise of doomsayers who just two years ago
reckoned its debts were so big that only a return to a devalued
drachma could save it from decades of ruin, Greece is now
mulling a five-year bond sale within the next three months,
according to a finance ministry official.
The plan to return to capital markets just over 24 months
after its debt restructuring amounted to default appears to make
little sense on paper.
Estimates of Greece's potential market borrowing costs over
five years range from 3.25 percent to 6.5 percent - indicating
that even the most optimistic scenario is more than double the
roughly 1.5 percent cost of borrowing from the European Union.
But if Athens can persuade private bond investors to buy
1.5-2 billion euros so shortly after imposing heavy losses on
them, it could be a game changer that boosts its ability to
repay its debts at affordable interest rates.
It would not only raise confidence in Greece's ability to
fund itself and aid its recovery, but it also offers Europe the
chance to claim its widely criticised crisis medicine of tough
cuts and austerity was necessary and ultimately successful.
"It would be hugely important for them in a symbolic way,"
said Hung Tran, executive managing director at the Institute of
International Finance, a global financial industry body that
negotiated Greece's debt restructuring in March 2012.
"The government wants to have the narrative that Greece has
overcome the crisis and regained international confidence... If
you look at it from the euro zone's perspective you might
consider (Greece's progress)... a success story."
Since Mongolia became the first sovereign to restructure its
bonds in 1997, it has taken an average 4.5 years for countries
to come back to the market, with almost half of those countries
still locked out, IIF data show. Considering only those that
regained market access, the average time was 3.3 years.
Thirty-four countries have restructured their bonds over the
intervening 17 years. Prior to 1997, states had only
When it restructured its debt, Greece exchanged its old
bonds for cheaper ones coming due in the next 10-to-30 years. It
has no liquid bonds maturing earlier than that, so estimating
what would be its five-year borrowing costs is a tough task.
Piraeus, Greece's second largest bank, issued a
three-year bond two weeks ago at a yield of roughly 5 percent.
Taking that as a proxy, and adding a premium for the longer
maturity and Greece's lower ratings, Isabelle Sanson, a fixed
income portfolio manager for Natixis AM, estimates Greece could
issue at 6 to 6.5 percent - equal or slightly lower than its 10-
and 30-year secondary market yields.
Fadi Zaher, head of bonds and currencies at Kleinwort
Benson, thinks the cost should be at least 300 basis points over
Italy's, or roughly "5-6 percent".
None of them would buy Greek bonds for that price though,
saying Greece's debt burden of roughly 170 percent of economic
output still poses significant repayment risks.
Yet, optimists say tapping real demand for this paper could
become a virtuous circle. Greek bondholder Hans Humes, chief
investment officer at Greylock Capital, said costs should be as
low as 25 bps above Portugal's, or about 3.25 percent.
For a start, high borrowing costs are not always a deterrent
for issuers where proof of access is paramount. When it came
back to the market after a two-year post-bailout hiatus, Ireland
issued five-year bonds at 5.9 percent in 2012.
Strong demand at the sale acted as a catalyst for further
falls in yields and now they trade around 1.65 percent. Portugal
came back after a similar break with a five-year bond at 4.9
percent in 2013. Now those bonds trade at 3 percent.
"Sure, the costs are a bit higher when coming to the market
but the sooner they do it the better," said Humes, who believes
Greece's debts to the private sector are so small compared to
those owed to the EU and IMF that another haircut imposed on
private investors makes little sense.
"Selling to a voluntary market on a new issue basis is a
game changer," he said.
Another reason why analysts believe Greece is considering
this sale is that a strong result could earn some points for the
ruling parties before the European elections in May.
But such timing would be another reason to worry for some
investors. The anti-bailout Syriza opposition party is leading
in polls and a win at the EU elections could strengthen its
calls for early national elections in Greece.
The government only has a three-seat majority in parliament
so early elections are a constant risk.
"It's a political decision (to come back to the market).
It's a good time for the public opinion to show that austerity
measures have not been unnecessary," said Sanson of Natixis.
"But I'm not sure I would want to invest in Greece
especially before the European elections ... Syriza is an
anti-euro party and there is still a lot of uncertainty."
Greece's ruling parties would not be the only ones boasting
about a successful sale. Many political leaders across Europe
would try to capitalise on it too.
Other observers say politicians will be more restrained.
Analysts attribute most of the rally in lower-rated bonds -
Greece's 10-year yields have fallen to 6.50 percent
from over 30 percent in the past two years - to European Central
Bank President Mario Draghi's promise to "do whatever it takes"
to save the euro zone.
Major reforms such as transforming the euro area into a
fiscal and a banking union are still yet to be completed.
"One can also make the case that (the easing of the euro
zone crisis) comes from the ECB's promise to keep the euro
intact ... and that fundamental reforms made some progress but
nowhere near what needs to be done," said Tran at the IIF.
(Additional reporting by the Athens bureau and Jeb Blount in
Rio de Janeiro; Editing by Giles Elgood)