* Pariah plans return two years after restructuring
* Greece hoping to replicate Ireland, Portugal rehab
* Debt agency also studying US dollar debt sale
By John Geddie
LONDON, March 20 (IFR) - Greece’s return to the international debt markets could be just around the corner, despite the country inflicting painful haircuts on investors just two years ago.
Greece would be the last bailed-out peripheral country to stage a bond market comeback following Ireland and Portugal in 2013, and follow a thumbs-up from the Troika and an impressive senior issue from one of its largest banks this week .
Many of its primary dealers say the earlier the return the better, as demand from yield-starved investors ramps up, and a deal could even come before European elections in May.
“From a demand perspective, Greece could access the market today,” said Philip Brown, head of public sector origination at Citigroup, a bank that makes markets in Greek government bonds.
“There is a process of normalization taking place in Greece’s investor base. Six months ago the market was dominated by emerging and distressed funds in London and the US, but now we are seeing an increasingly diversified range of participants including some European real money coming back to the market.”
Greek yields have dropped to their lowest levels since the country’s 237bn bailout started back in 2010.
This rally was given a further leg up after international lenders approved a deal to unlock the latest tranche of aid on Tuesday, leading senior members of Greece’s finance ministry to unveil plans to raise up to 2bn in five-year bonds in the first half this year.
Such an issue would fill a gap in Greece’s curve between its short-dated T-Bills and its restructured bonds, the shortest of which matures in 2023, but more than that it would be an important milestone on the country’s path to rehabilitation.
This rehabilitation would come despite Greece being rated six notches below investment grade by S&P and Fitch, and seven notches below by Moody’s in the dubious CCC category.
This contrasts with Ireland, which only had one junk rating when it returned to markets, and Portugal, which was between one and three notches below investment grade by the three main agencies.
However, Mark Dowding, a senior portfolio manager at BlueBay, one of Europe’s largest bond funds, believes that the rating should not be an obstacle to issuance.
“In many respects, those funds who have had appetite to invest in Portugal recently are also likely to look at any Greek deal,” said Dowding.
“I would assume any planned issuance would be targeted at both real money and distressed investors.”
Traders in Greek debt agree that the stars are aligning for the sovereign’s return.
Not only are investors switching out of other peripheral debt to buy Greece - its 10-year bonds currently offer a 240bp pick up to equivalent Portuguese bonds, and 350bp to Spain and Italy - but many emerging markets investors, rattled by recent political events in Turkey and Ukraine, are now being enticed by the yields offered by the eurozone’s pariah state.
Equivalent Russian and Turkish US dollar benchmarks - two of the largest components of Global emerging market indices - are currently trading through Greece by 140bp and 120bp, respectively.
“In light of little emerging market sovereign issuance so far this year, I wouldn’t be surprised if emerging market investors would add Greece to their portfolios,” said Zsolt Papp, director, Emerging Market fixed income at Swiss private bank UBP.
But while appetite is clearly there, Greece’s route back to the capital markets is not as easy as Ireland and Portugal‘s.
It is in the unique position of having recently restructured its debt - an act which still lives in the memory of many prospective investors.
“I‘m sure I‘m not the only fund manager with guidelines that prohibit me from buying anything that has defaulted in the last five years,” said Gareth Colesmith, senior portfolio manager at Insight Investment.
Many investors also question what the future path of government policy will be in the country, especially given that the radical left opposition party is currently ahead in the polls.
“In Greece, political risk appears to present the greatest uncertainty,” said Dowding at Bluebay.
Bankers in talks with the Greek debt agency also said one of the big decisions the country faces is whether to issue in US dollars, the preference of US-based hedge funds that bought Greek debt at the height of the crisis, or stick to its own currency in the hope that investors it has previously burned will return.
Ireland also faced such a quandary ahead of its market return last year, opting at the last minute to stick with euros after cross-currency swap rates shifted, said sources close to that transaction. Portugal also stuck with euros.
In public, Greek officials have been silent on the matter of currency, but should take heart from the fact that over 3bn of orders were placed for a senior debt issue from Piraeus on Tuesday, the first debt sale from a Greek financial since 2009. (Reporting by John Geddie; additional reporting by Sudip Roy; editing by Helene Durand, Julian Baker)