Transcript: Interview with Greece Public Debt Management Agency’s Dimitris Tsakonas on 8 November 2024

20 November 2024

By Marta Vilar – ATHENS (Econostream) – Following is the full transcript of the interview conducted by Econostream on 8 November 2024 with Dimitris Tsakonas, Director General of the Greek Public Debt Management Agency:

Q: Greece has been following a proactive issuance strategy over the last few years. What should markets expect for next year's strategy?

A: The most challenging part of my job these last few years and in the years to come is to find space for funding activity, because we have very limited gross financing needs. Having €46 billion of cash reserves, 21% of our GDP, makes it difficult for us to have access to capital markets. However, we must preserve a liquid yield curve of risk-free rates, so we need to have continuous access to capital markets and dialogue with investors. Next year we will do a strategy similar to what we have done so far, most probably a little bit less, because next year's gross financial needs are very limited.

Q: Back to 2024, are we going to see any more issuance activity?

A: We are not going to have any further syndications. We are more or less done. The last auction for this year was today’s (Wednesday 20 November). We raised €250 million. This year there was a need to replace the reduction of T-bill stock by €4 billion with new bond issuances. We extended the maturity for this reason, because we replaced securities with an average maturity of six months with bonds with an average maturity of 15 years. We also decided to early repay almost €8 billion of the so-called bilateral loans coming from the first fiscal adjustment programme. This early repayment will take place on December 13 and is an additional repayment when compared to the original target of €5.7 billion, according to the Greek public debt amortisation profile. And last but not least, we didn't roll over €1 billion that we had in repos. So, not only we are satisfied with having financed our gross borrowing needs, but we have also replaced €4 billion of debt due to the T-bill stock reduction and €1 billion due to the non-rollover of repos, and on top we are going to prepay close to €8 billion of the Greek Loan Facility. And still, by the end of the year we will have close to €30 billion of cash reserves because tax revenues are going to be much higher than the original estimate.

Q: How will this impact next year’s funding strategy?

A: So, for next year’s funding activity, knowing that we will not be able to reduce even further the T-bill stock, we will have close to €11 billion of gross financing needs and will have to reinvent the wheel. Most probably, the actual primary surplus in cash terms will be close to €7 billion, so the remaining room for funding activity will be €3-4 billion, and with such low funding we will not be in a position to preserve the yield curve. That’s why we are in close contact with Eurozone partners for a potential additional early repayment of the Greek Loan Facility next year in the way in which we have done it so far. The amount will be circa €5 billion.

Q: Will it be enough?

A: I don’t know, it remains to be seen. Are we going to proceed with a potential liability management exercise, buying back certain debt and replacing it with new bonds, just to provide liquidity to the longer part of the maturity spectrum? The answer is maybe. But this could have a side effect. Our problem is that, due to our absence of more than 10 years from capital markets and given the imposition of the PSI about eliminating the tradeable portfolio of public debt, which is more or less €90-95 billion, the real free float of this is more or less €20-25 billion. With such small free float, we don't have an efficient and liquid secondary market. So, we are obliged to issue for this reason.

Q: So, how are you planning to structure your issuance next year?

A: Most probably a syndicated bond issuance would take place, at least one but perhaps two, depending on the room that we find for funding activity. It also seems logical to proceed with a 10-year bond issuance. Again, I don’t know in which month this could take place or if it would be the first tranche. But we are flexible. Everything depends on market conditions and investors’ appetite. If investors want a 30-year bond, we will be very happy to issue a 30-year. If investors want a 5-year we will be very happy to issue a 5-year. In terms of how we are going to issue, we are going to replicate what we have done so far. Around 70-80% of our funding activity would take place through syndicated bond issuances and the rest through our regular bond auction calendar. The overall amount, given the current circumstances, would be close to €8 billion, compared to the €10 billion that we issued this year.

Q: What about any buybacks?

A: The potential liability management exercise and bond swap could take place, but we need to be very careful and take into account the possibility to have as a side effect a further deterioration of liquidity in the short part of the yield curve. If we say we will buy everything from the tradeable portfolio, not the public sector, that matures in 2027 or 2028 because we have €30-40 billion in cash, most probably we won’t have a yield curve within this three-year maturity period. You cannot have a black hole in your maturity spectrum, it would be disastrous. And by aggressively buying everything that matures within the next 3-4 years we are going to create even further distortions. Prices would go much higher compared to today’s level and yields would go much lower, but this would be artificial.

Q: Does this mean that you are not planning any buybacks?

A: For the time being we are focused on buybacks of official sector debt, because this provides us the opportunity to find space for funding activity without having the side effect that I mentioned before. We try to replace official sector debt, which is not a tradeable portfolio, with tradeable securities in order to improve the secondary market liquidity, to provide supply and to fill the gaps across the maturity spectrum.

Q: So, some buybacks but very limited?

A: Buybacks in the official sector yes, but whether there will be buybacks in the tradeable portfolio remains to be seen.

Q: You said before you were very flexible. What market opportunities are you seeing now?

A: It depends on the issuer. I think that Greece has already issued securities with long duration to investors, and they need time to digest what we have provided. But still, given the circumstances, the uncertainty and the volatility, my feeling is that for the time being - and this has nothing to do with Greece in particular - investors would prefer shorter maturities rather than longer maturities. At least that’s the case for now, I don’t know what is going to happen in two months’ time. But given the fact that we are already at the end of the year and everybody is reluctant to make unnecessary losses due to market volatility, I doubt that they would want to invest in a 30-year or a 50-year bond. My feeling is that investors are reluctant to invest in ultra-long securities. If I were to go the markets now, I would sooner go for a 5-year bond rather than a 30-year bond.

Q: How many syndications are you expecting to deliver next year?

A: We did two this year, so more or less two. Markets know how limited our gross financing needs are. With €8 billion we can proceed with one or two syndications, plus up to €2 billion issuances in regular auctions. Just to clarify that, the aforementioned €2 billion amount will be part of the overall €8 billion amount.

Q: It has almost been a year since S&P Global and Fitch upgraded Greece's rating back to investment grade. To what extent do you think that the demand seen after that is due to excitement and how long can that excitement remain?

A: After we were granted back the investment grade we saw an expansion of our real money investors base by 30%, which was impressive. That's why we saw a tightening of our spreads versus swap rates of 80bp. If you compare the outcome of the 10-year bond issuance that took place in 2024 after the upgrades with the 10-year bond issuance a year earlier, in 2023, you will see that in terms of spreads vs swap rates we had a reduction of 80bp. The outcome is spectacular. Our debt looks like a bond because it has a weighted average maturity of 19 years. 100% of it is in fixed rate. And it has a nominal coupon, i.e. the effective rate, of 1.5% and an outstanding nominal amount of €365 billion. The DV01 of this “bond”, with €365 billion nominal amount, is more than €500 million per basis point. If you multiply these €500 million by 80bp you are going to find at least €40 billion in PV terms as the positive outcome due to the investment grade status achievement. I am pretty confident that this tightening took place because of the increased appetite of investors. And now the question is: is there any room for further tightening? If we were to achieve the BBB- status by Moody’s, rough estimations say that the potential increased appetite could be, perhaps, €3-5 billion due to changes in the composition of indexes for passive investors. I don’t know how high the additional appetite will be, but there will be some. Even despite our limited gross financing needs, there will always be the so-called scarcity value that drives prices higher and yields lower. If you ask me how many basis points this will be, I would say I don’t know, but probably 10-30bp, or more.

Q: Earlier you mentioned an additional early repayment for next year. The market was already expecting one in January, if I’m correct. Is this another one?

A: Not in January. We are going to start discussions about it after December 13, when we are going to early repay close to €8 billion of the Greek Loan Facility Agreement. We will try to have an additional early repayment next year of some €5 billion, if possible even more. If all the 15 countries that lent us money on the GLF are on board, a potential early repayment will take place in December 2025. In principle I think we have an agreement.

Q: Would those early repayments that you expect in the near term bring forward the date at which you expect to complete the bailout payments?

A: The original plan is to proceed with early payments for the next two years. We're going to use the €15.7 billion of the so-called cash buffer account. This is within the €40-45 billion of cash reserves. We have agreed with the EFSF and the ESM that we're going to use one third of this cash buffer account every year in order to repay official sector debt, i.e. the bilateral loans. This will happen this year for the first time. We're going to use €5 billion from this cash buffer account. From 2027 onwards it remains to be seen, I cannot tell you now what is going to happen. But in 2025 and 2026 we want to proceed with early repayments that would also allow us to reduce to zero the cash buffer account. Now it has an outstanding amount of €15.7 billion. At the end of 2026 we would most probably have used this amount of €15.7 billion. But given the extended maturity profile of official sector loans, more than 30 years, there's no possibility to replace in the blink of an eye the official sector debt with Greek Government Securities (GGBs). But this will last for a long period of time, for sure more than a decade, perhaps two. Because in order to have an efficient and liquid secondary market you need to have, at least, the outstanding amount of tradeable debt that we used to have before the imposition of the PSI, this is €260 billion. And now we have just €95 billion, out of which only €20-25 billion is free float.

Q: When do you think you will be back to having the amount of outstanding tradeable debt you had before you were excluded from capital markets?

A: I don't know. As I said, maybe in 20 years’ time. Given the fact that we deliver as far as the primary surplus is concerned and given the fact that we have very limited gross financing needs, the amount of outstanding public debt is going to be reduced in absolute terms, not just in the debt-to-GDP ratio.

Q: Eurostat will add deferred interest payments of more than €12 billion in the Greek government debt, which is expected to generate an upward adjustment of around 5% in your debt-to-GDP ratio. Does this have any impact on your issuance plans?

A: No. Everything has been taken into account. This issue is well known since 2012. We used to be the ones who said that despite not delivering these interest payments, they should be incorporated into our interest payments on an accrual basis and also should be incorporated into our debt figure. This year they decided to proceed and incorporate these starting from 2013. This has increased our statistical debt by €12.4 billion as of the end of the previous year and will increase it by approximately €1.2 billion annually until 2032. The outcome would be, according to the European Commission, close to €20-25 billion. Our conservative assumptions are around €25 billion. But it was decided that this amount should be repaid from 2033 onwards, bearing in mind that if we were to treat it like debt, it should have an average maturity of 20 years, and the final maturity date should not exceed year 2070. This will not have an impact on gross financing needs because it has already been decided and agreed that it will be repaid after 2033 and PDMA follows the most conservative assumption. There will be no impact on debt sustainability either, because we have assumed the worst-case scenario in terms of repayment.

Q: The market expected you to issue your first green bond around 2021-2023. However, there is still no news in this regard. Why have you refrained from issuing a green bond so far?

A: At that point in time we were not in a position to say that we are going to deliver a primary surplus and we hadn’t finalised the proactive debt management strategy that we did. Now, for example, we know that we have no interest rate exposure. So, for the foreseeable future, our gross financing needs will be very limited, and we need to preserve our conventional yield curve. By issuing a green bond, an inflation-linked bond or bonds in dollars or other foreign currencies we would have more fragmentation as a side effect, because our funding activity for conventional bonds would be reduced. The other problem is that a lot of green projects have already been financed by funds like those from the Next Generation EU or EU Structural Funds. Plus, there is no greenium element for us. Even assuming that there was, it would be gone, because for a potential Greek green bond, the issued amount would be small and therefore there would be a cost known as “liquidity premium” associated with covering the liquidity risk. Although we were keen to proceed with a green bond and we are very familiar with these securities, we don’t have enough gross financing needs and green projects which are not already funded by other sources to do it.

Q: So, when should the market expect Greece to enter this market? What should happen for you to decide it’s time to do so?

A: Since all green projects or expenditures are part of our deficit and since fiscal rules are very strict, I doubt we will be in a position to proceed with green bond issuance shortly. But if Europe decides that expenditures for some green projects should not be considered an expenditure and therefore have a fiscal impact, but rather are regarded as an investment in an asset, I would say we then can issue green bonds to finance these green projects.

Q: Greece’s debt average maturity is pretty high at 20 years. It has been following a downward trend since 2019 but is still significantly higher than the rest of its European peers (Ireland is 11 years, Cyprus 9 years, Spain 8 years…). Do you expect this to continue decreasing? If so, how far?

A: By definition, our average maturity will be reduced by one year every year. Our landing point will be 10 years, which is slighter higher than the Eurozone average. This will happen around 2034 to 2035.

Q: Now the Greek spread with the German bund is 90bp. Is that level appropriate for you or are you expecting it to ease a bit more?

A: On the one hand we feel very happy because this clearly reflects the efforts that we have made during all these 15 years of crisis and recovery. On the other hand, this has perhaps a side effect: we have lost our competitive advantage versus other Eurozone peers. But yes, I’m expecting further tightening.

Q: Greek GDP is still below 2010 levels, before the start of the sovereign debt crisis. When do you expect it to surpass these levels?

A: In a year’s time. If I remember correctly, the highest level we used to have was €245 billion, and this year it will be €235 billion by the end of the year. Taking into account that in the upcoming years we will likely have 4.5-5% of nominal GDP growth, in a year or a year and a half we would be back to the levels we used to be at before the crisis, that is, 2008.