El-Erian: Cautious optimism about Greece's return to capital markets

April 3, 2014: 10:29 AM ET

Renewed access to financing must not divert the debt-troubled nation from implementing critical economic reforms.

By Mohamed A. El-Erian


FORTUNE -- The Greek Government caused quite a stir this week when it announced it would soon re-enter the international capital markets. Rightly so. It is a big deal for a sovereign to be able to place its first voluntary bond issuance after having undergone a debt restructuring that imposed considerable losses on investors and shut voluntary access to private capital financing.

With the overall unemployment rate at 27%, and with youth joblessness at 58%, few are daft enough to confuse Greece's likely return to voluntary market funding with an all clear sign on the economy. However, the risk is elsewhere -- that the renewed availability of private financing will defer rather than support the yet-to-be-completed economic reform effort.

Renewed market access is a direct consequence of the multi-year efforts Greece has made in overcoming its massive financial imbalances, as well as enormous backing from European neighbors and the International Monetary Fund.

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Like others, the country is also benefiting from a notable, albeit less sustainable, market phenomenon -- namely, a seemingly insatiable investor appetite for the "down in quality" bond trade in search of increasingly scarce yield.

Having said that, we should remember that it took over six months for the Greek government to finally reach agreement with its official creditors on the release of delayed funding under the country's second international bailout package. In the process, some policy measures were deferred; others only partially implemented.

Given the protracted negotiations, the government is not very enthusiastic about negotiating a new package. If anything, the temptation is to use the renewed availability of private bond financing to reduce dependence on official funding and, in the process, dilute outsiders' policy conditionality that comes with that.

There are three big reasons why such a course of action would likely prove short-sighted for Greece; and it would also expose new bond investors to risks down the road.

First, notwithstanding the massive decline in market yields on Greek securities, the level at which the government would likely borrow these days (around 7%) is still above what would be deemed safe in terms of debt sustainability. It is also a multiple of what it pays on loans from official creditors.

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Second, the existing stock of Greek debt remains uncomfortably high. It is also less flexible now that its composition has shifted markedly in favor of more senior, and therefore harder to restructure, official debt (including considerable obligations to the European Central Bank and the IMF).

Third, economic growth remains anemic, depriving Greece from the one remedy that allows debtors to improve living standards while also dealing with legacy obligations.

Greece still has quite a way to go before it can decisively emerge from a crisis that has caused havoc, impoverished millions of citizens, and caused many others to migrate in search of a better life. It would be a tragedy if its impending return to international capital markets were to serve as an excuse to delay the required reforms.

Mohamed A. El-Erian, former CEO and co-CIO of PIMCO, is a member of the International Executive Committee at Allianz and chief economic advisor to its management board, chair of the President's Global Development Council, and author of the NYT/WSJ bestseller When Markets Collide. Follow him on Twitter @elerianm.

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