Rumours, Rumours, and No Greek Bond Sales To China

This is a post which was originally published at A Fistful of Euros.

Well there certainly is a lot happening out there at the moment. And Monday’s successful bond sale which left the Greek government triumphantly proclaiming they could comfortably meet their 2010 borrowing program now seem to belong to a lifetime ago. The bond raised 8 billion euros over a 5-year syndicated bond which attracted total bids of EUR25 billion, well above the EUR 3 billion to EUR5 billion targeted by the government, who immediately declared a major victory.

That was before yesterday, and the Financial Times announcement on Wednesday that Athens was wooing Beijing to buy up to €25bn of government bonds in a deal promoted by Goldman. China had not yet agreed to such a purchase, according to the FT at the time. In the wake of this announcement – as the FT put it – “Greece’s debt crisis returned to financial markets with a vengeance as agitated investors demanded the highest premiums to buy its government bonds since the launch of European monetary union over a decade ago”.

In fact, the yield spread between 10-year Greek bonds and benchmark German Bunds widened dramatically, by almost 0.7 percentage points at one point, in a general panic by sellers worried about Greece’s ability to refinance its debt. But the biggest impetus to the debacle actually came not from the FT announcement, but from the Greek governments denial it had given a mandate to Goldman Sachs to sell government debt to China. As a result. Greek 10-year bond yields closed at 6.70 per cent, 0.48 percentage points up on the day. In addition, the lid was virtually sealed on the Greek fate by statements reported in Bloomberg from Yu Yongding, a former adviser to the Chinese central bank, who is quoted as saying that China shouldn’t buy a “large chunk” of Greek government debt to help rescue the country because their securities “are more risky than U.S. Treasuries”. “Let European governments and the European Central Bank rescue Greece”, he said.

But the Greek finance ministry came out and attempted to deny that any such negotiations were taking place: “The Finance Ministry categorically denies that there is any deal to sell Greek bonds to China. The Finance Ministry has not mandated Goldman Sachs to negotiate any deal with China.” But wording here is important. There evidently is no deal, and Goldman Sachs were given no “mandate” – but that doesn’t mean they weren’t in Beijing, negotiating on Greece’s behalf. In fact, as the FT notes, this issue goes back to last autumn:

Greece’s attempt to attract Chinese investors to buy a slice of its sovereign debt took shape last November at a lunch attended by George Papandreou, the prime minister, and Gary Cohn, chief operating officer of Goldman Sachs, the US investment bank. Faced by a soaring budget deficit and record public debt, the newly installed socialist government was eager for ideas about how to finance this year’s €55bn ($77.5bn, £48bn) borrowing requirement, the FT has learnt.

Goldman was keen to promote a Greek bond sale to the Chinese government and the State Administration of Foreign Exchange, which manages the country’s foreign exchange reserves – increasing at a rate of $50bn (€35bn, £31bn) monthly in recent months.

Goldman Sachs has close involvement with the struggling Greek government. The investment bank – along with Deutsche Bank – last month organised the government’s first roadshow to London, led by George Papaconstantinou, the finance minister. It was also one of four foreign banks – the others were Deutsche Bank, Credit Suisse and Morgan Stanley – that arranged Monday’s successful bond offering, along with two Greek banks.

The Greek Prime Minister George Papandreou has also denied the reports – although again, watch the wording. Speaking at Davos he said that recent media reports that China would buy up to E25 billion worth of Greek sovereign bonds are “wrong,” and that Greece has “not asked for money anywhere else.” He added: “We are in a jittery time” in which “rumours can create problems.” Greece’s Finance Minister George Papaconstantinou also reiterated the same points: “We have not talked to China and no investment bank has a mandate from us to talk to China,” he said in an interview with The Wall Street Journal.

But if we go back again to Tuesday – and before the rumpus broke out – Mr Papaconstantinou gave an earlier interview to the Wall Street Journal where the Greek Finance Minister detailed a diversified global borrowing plan to plug government fiscal gaps, including hopes to raise up to $10 billion from Chinese and other Asian investors.

Papaconstantinou will lead a delegation next month to the U.S. and Asia to market Greek debt valued at at least $1.5 billion to $2 billion denominated in euros, dollars and possibly yen. But Greek officials hope that the bond tour, which will include stops in Beijing, Shanghai and Hong Kong, could bring in five times that amount if Chinese investors are attracted to the deal. “There is a lot of liquidity in China. There are big funds in China. This is why China is going to be part of the road show,” he said, adding that if Chinese investors are to get involved the bond size has to be “significant… possibly $5 billion to $10 billion.” A person familiar with the situation has told Dow Jones that Greece is trying to place as much as EUR20 billion to EUR25 billion overall with Chinese investors.

And indeed Reuters today reports that the Greek government has backtracked somewhat, since while they had previously announced they were going to stage a roadshow for investors in East Asia, including China, and the United States sometime this year, the head of the Greek debt agency (PDMA) said on Wednesday that no date had yet been set. “Finance ministry officials said the roadshow might take place at the end of February or in March, depending on Greece’s borrowing plan, which has not been finalised.”

Really the main issue facing the Greek authorities at this point is one of credibility, and as the Financial Times says, “at the heart of Greece’s problems is a lack of confidence in its trustworthiness”, a confidence which was lost in the course of a number of “incidents” with the EU Eurostat statistics office, and a confidence which the recent handling of the China bond issue will have done little to restore.

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