By Tasos Dasopoulos
The financial staff is on alert, in view of the start of the process of raising interest rates by the ECB after the indefinite postponement of the return of inflation to 2% due to the war in Ukraine.
Christine Lagarde’s statements about the time when the ECB intends to start raising interest rates on the euro, along with the energy crisis, have sparked a new rally in bond yields across the eurozone. The Greek 10-year title has been trading since the beginning of the month with a yield close to 3.5%, which is expected to increase close to 4% in the summer.
The initial plan of the Ministry of Finance was overturned at the point that the cycle of interest rate increases comes with Greece not yet having regained the investment level, as originally expected. In the short term, Greece has to expect a modest increase in yields, due to the successive announcements of the ECB that it will continue to support Greek bonds beyond the reinvestment for securities that expire by 2024. In terms of financing liabilities of debt, but also of the budget deficit for 2022, there is the solution of very high cash, which remain close to 40 billion. But this amount includes money from the Recovery Fund (about 7 billion) , which are pre-committed to specific actions.
On the other hand, sources from the financial staff admit that Greece continues to pay the “risk premium” of very high debt. They note that the good image that the country has and its bonds in the markets is a result of the effort made to reduce deficits and debt and the growth dynamics of the economy. If this picture is overturned by failures, delays or a large slowdown in growth, returns can skyrocket, postponing indefinitely the upgrade to the investment grade.
A second weak point is that Greece has not yet created a bond market after the end of the third memorandum. Since its return to regular bond issues in 2019, it has borrowed about 53 billion euros from markets with relatively favorable interest rates. In order to complete the Greek bond market, Greece will have to borrow even at a higher cost on a regular basis from the markets, if it wants at some point to see its bond yields at consistently low levels.
The medium-term consequences
Today, Greece has negotiable bonds worth about 70 billion euros, which it will have to finance on a regular basis. As of this year, Greece has begun to repay the approximately 260 billion euros of European loans it received with the three memoranda. The 52.3 billion euro bilateral loan it received from the Eurozone countries (GLF) in 2010 has first started to be repaid. Greece has so far anticipated the developments and received approval to repay the first two installments of 2022 and 2023. over time, while repaying the last 1.8 billion to the IMF. In 2023, EFSF / ESM loans will begin to be repaid. It is therefore obvious that in the coming years it will need to borrow more and more from the markets, in order to refinance an increasing part of its debt.
The real economy
Another serious consequence of the early interest rate hike that worries the financial staff is the impact of rising lending rates on the real economy.
Banks will improve their profitability, but companies will borrow more and more expensive for working capital and investments. The increase in the cost of money is expected to have a negative impact on investment, combined with the continuation of the war in Ukraine and high inflation, which is expected to continue after the end of the year.
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