Greece makes first return to debt market in three years

Greece has been frozen out of the financial markets

Greece is returning to the financial markets to borrow money.

The country's Debt Management Agency announced plans to sell bonds that will be repaid in five years. It is the first sale of government debt since 2014, when Greece made a brief return to the markets.

It is being seen as an important milestone for Greece.

Since 2010 the government has been dependent on bailout money to meet its borrowing needs.

Third bailout programme

The bailouts began when Greece was frozen out of the financial markets. It couldn't borrow what it needed as investors become convinced it wouldn't be able to repay.

And those needs were very large. In the year before the first bailout started, the deficit in the Greek government's finances was 35bn euros (£31bn), which is a lot for a small economy, equivalent to 15% of its total national income, or GDP.

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Greece is now into its third bailout loan programme. The main source of finance has been the eurozone - for the first loan the money came from other governments that use the currency, and EU bailout agencies supplied funds for the second two.

In total Greece has received bailout payments of more than a quarter of a trillion euros, and there's as much as 47bn euros more available over the next year.

Greece also had the benefit of a restructuring of the debt it owed to the private sector. In 2012 most of the bondholders swapped their bonds for an alternative.

The reduction in face value of that debt was 53.5%, but concerns in the markets about the possibility of further restructuring meant that the loss to investors was arguably much greater.

The current, third, bailout is due to end next year - and by "end" we mean the final payment will be made to Greece. The final repayment is due more than 40 years from now.

Pay and pension cuts

When the bailout payments end, the aim is for the Greek government to be able to meet all its financial needs from taxation and borrowing in the markets. What Greece is doing now is a "toe in the water" - an attempt to get some indication of how well that process might go.

There is a widespread view that Greece will need debt relief. The International Monetary Fund (IMF) has been the most insistent on that point.

Indeed, until recently the IMF had refused to contribute financially to the third bailout without it. What the Fund has now agreed is an "in principle" commitment - an indication that the IMF will contribute, provided debt relief is confirmed next year.

The changes to the Greek economy have been painful

There is no question that in the seven years of bailouts, the Greek government's annual finances have improved. That enormous deficit has gone. Last year there was a small surplus.

This year Greece is likely to be back in the red, but it will be a moderate deficit, projected by the IMF to be 1.5% of GDP.

The adjustment has been painful. The economy has contracted by more than 25% since the peak of the pre-crisis boom and government spending has declined by more than 30% in real terms. That reflects declining public sector employment, pay and pension cuts, and reduced public services.

The unemployment rate is more than 20%, and among young people it is close to 50%.

Fits and starts

So can Greece finance itself from next year? Those investors who buy the new bonds presumably think either that it can, or they assume Greece will get further bailouts or debt relief to the extent needed to ensure it can meet the repayment commitments.

What's in it for them? The return they will get, assuming the repayments are made as promised, will be better than they can expect on bonds from other eurozone countries.

Looking at 10-year bonds currently trading in the market, for Greece the annual return is about 5%. For other bailed-out countries it's about 3% for Portugal, 1.5% for Spain and below 1% for Ireland.

There has been no sustained Greek economic recovery

The reason the return is relatively attractive is that there is still some risk associated with buying Greek government debt. For one thing, the economic outlook is still very uncertain.

The declines in economic activity have, apparently, come to an end. But there has been no sustained recovery. Greece has had fits and starts of growth since 2013, but nothing durable. The economy is about the same size now as it was then.

Still, the fact that Greece can seriously contemplate going to the financial markets is progress of sorts. It is perhaps even more striking because this development comes under the government of a party - Syriza - that fought an election under a radical left and anti-austerity programme.

For long suffering Greeks, the road to recovery is - at best - only starting.