The ‘dialogue’ with the markets and the nightmare of fuel

By Tasos Dasopoulos

Relatively small so far, the “losses” in terms of increasing the cost of public borrowing from the energy crisis that began in the last quarter of 2021 and has now deepened significantly, after the war in Ukraine.

In 4.5 months, since last October, borrowing costs have increased by 200% compared to last summer’s levels. The 10-year bond traded at 2.4% against 0.8% last July, and the 5-year bond at 1.2% from -0.134% in the middle of last summer.

However, the increase in yields was the expected price, due to the nervousness of the markets from the beginning of the time of the discount of the change of course in the monetary policy by the ECB, due to the high inflation.

In the overall picture of rising yields in the Eurozone (Germany saw for the first time a positive return on its own 10-year bond since 2019), Greece also paid the risk premium of high debt and the absence of investment grade, with the return in its own 10-year bond to peak at 2.70% in February to fall today to 2.30%. This is while the markets have shown with their attitude in 2020 and most of 2021 that Greece would have regained the investment level, if the world did not go through the crisis from the coronavirus pandemic. The ECB seems to be convinced of the same. Following the exception that included Greece in the Extraordinary Bond Purchase Program (PEPP), it gave a new vote of confidence in December for the period after the end of the program, stating that it will support Greece, buying government securities beyond its level. reinvestment in those that expire.

At the same time, the positive expectations of rating agencies and investment banks for Greece are being met. After the great recession of 9% in 2020, mainly due to the decline in tourism, Greece recovered almost completely in 2021, recording growth of 8.3% while for 2022 all international organizations expect a second consecutive year of growth with a change in GDP 5%.

At the same time, the EU notes in each of its assessments that progress is being made on difficult reforms such as clearing red loans and improving the functioning of the state. At the same time, Greece is moving forward to leave behind the great economic crisis, repaying within the month, the remaining 1.9 billion from the IMF loans and 5.3 billion from the transnational loan taken by the country, entering the first memorandum.

War blurs the landscape

The war in Ukraine has exacerbated the energy crisis, sending the last 10 days of gas, oil and electricity prices breaking a new record every day.

Markets are now anticipating a global slowdown due to high inflation from the intensifying energy crisis. What is still unknown is whether we are experiencing the peak or the beginning of the crisis and what its duration will be.

At present, the bond market is considered a “safe haven” for those who sell shares and close their positions to be placed in government bonds. For this reason, after the initial rise since the beginning of the year since the start of the war in Ukraine, yields have fallen.

The duration of the war and what will follow will determine the course of fuel prices and, to a lesser extent, food prices. The first scenarios made by the European Commission speak of a 1% slowdown in the European economy and a further rise in inflation. This climate is expected to maintain, perhaps even after the end of the year, the uncertainty not only for the profits of companies but also for the course of Europe and especially of heavily indebted countries, such as Greece. Therefore, it is not unlikely that we will see the yields on Greek bonds return to 3% to 4% for the duration of the crisis.