The 3-year interest arrears and the interest rate risk

By Tasos Dasopoulos

The end of the zero-interest period on both sides of the Atlantic seems to be coming closer and closer, although the ECB has stated its opposition to a tighter monetary policy, at least for the foreseeable future.

Yesterday, the President of the ECB raised the interest even more, with just one sentence. He said the central bank was ready to adjust its monetary policy without adding “in any direction”. The change of phrase was interpreted as the beginning of the ECB’s change of attitude, which sees the changes only in one direction. The result was a surge in sales of Eurozone bonds, which translated for Greece in the 10-year bond yield rise above 1.9%. That is, at the levels found for a short time in the outbreak of the coronavirus pandemic, in April 2020.

Markets, seeing inflation rising to historic lows in Europe as well, are gradually anticipating the possibility of rising interest rates in the Eurozone as well. This, of course, as soon as the ECB enters the intermediate stages: the suspension of the Extraordinary Bond Purchase Program (PEPP) in March and the official Quantitative Easing (APP) perhaps before the end of 2022.

In practice, the strengthening of the gossip for a change in the course of monetary policy already affects the returns mainly of the so-called “periphery” of Europe (Italy, Spain, Portugal, Greece). In fact, Greek bonds at this stage are in the most difficult position, as despite the favorable debt profile, the country has not yet recovered its investment grade and at the same time has by far the highest debt as a percentage of GDP within the EU.

With these characteristics and due to the increased “risk” of the Greek debt, Greece will pay -again- the price of expensive public borrowing, with estimates by the Ministry of Finance to want the 10-year yield to rise over time over 3% .

Over 41 billion liabilities in three years

It is a given that Greece wants the season of rising interest rates to start as late as possible. The worst-case scenario is for the increase to start towards the end of 2022 and to complete most of the cycle of increases by 2024. Greece has for this three-year period to cover interest arrears of approximately 52 billion euros. This amount includes the coverage of the primary deficit of 2.7 billion euros (approximately 1.4% of GDP) that the budget is expected to have at the end of the year. Of the remaining 49.25 billion, 35.2 billion is amortization and about 14 billion interest. The amount is extremely small for a country that owes close to 200% of GDP. However, it is explained by the fact that about 2/3 of the debt is in the hands of official lenders.

The country also has cash available close to 40 billion euros, which gives -theoretically- the ability to meet its needs without having to borrow from the markets. In practice, the use of cash instead of borrowing is a “double-edged sword”, as if Greece avoids being exposed to borrowing from the markets, it faces the risk that investors will withdraw their confidence in Greek bonds.

Thus, it will be forced to borrow even at increased costs to maintain its “presence” in the markets. For this reason, it is a hidden expectation that the increases will start from the middle of 2023, so that Greece has regained its investment level and has somewhat stabilized its bond yields. However, the loss for the bond market is a given, as after the steadily declining course of bond yields from mid-2019 until the end of 2021, Greece will be forced to borrow at interest rates of 2017 and 2018, for a long time. space.