Just four years ago, Greece was on the verge of crashing out of the euro because it was broke and reluctant to accept the terms of a bailout to plug the gaping hole in its finances. Now, investors are effectively paying the country for the privilege of lending it money.
Europe’s most indebted country is the latest to sell government debt with a negative yield — meaning that if investors hold those bonds until they mature in three months, they get back less than they invested. It’s one of the strongest signals yet that ultra-low interest rates are here to stay.
Greece sold €487.5 million ($537 million) of bonds with a yield of minus 0.02% on Wednesday. Earlier this week, it sold 10-year bonds at a yield of just 1.5%. In 2012, yields on similar bonds were closer to 24%.
It’s a dramatic turn of events for a country that required the largest bailout in history and saw its government debt peak at above 180% of GDP.
Greece has received €204 billion ($225 billion) from European governments and the International Monetary Fund over the past eight years, according to the Euro Stability Mechanism, an intergovernmental organization.
As a condition of the loans, Greece’s government slashed spending, reducing the number of civil servants by 25% and cutting public sector wages by 30%. Consumer spending plummeted and unemployment spiked. The economy lost about one quarter of its size.
When interest rates go negative
Now it seems the reforms are paying off, helped by negative interest rates in Europe and bond-buying by the European Central Bank that has stimulated economic growth.
Greece joins the likes of Germany, Spain, Italy and smaller economies such as the Czech Republic in issuing debt at negative yields.
Some analysts say that negative yields in Greece do not signal increased demand from foreign investors. Instead, most bonds with negative yields have been purchased by local banks for use as collateral.
Yet they do reflect a trend seen in other developed economies following the financial crisis.
Some of the world’s most powerful central banks have pushed interest rates into negative territory in order to spur growth. Last month, the European Central Bank pushed its benchmark rate further below zero, to minus 0.5%.
According to Fitch Ratings, some $15 trillion worth of government debt with negative yields has been sold. In Germany, even the yield on 30-year bonds is negative.
“There’s a massive move globally towards lower yields, particularly in Europe following what the [ECB] did,” said Athanasios Vamvakidis, global head of G10 foreign exchange strategy at Bank of America Merrill Lynch.
Yet there are also concerns about the effects of negative rates. Some say they punish savers, inflate asset bubbles and benefit the wealthy. Many economists argue that increased spending by governments would be a more effective way to stimulate growth.
“Negative yields on long-dated government securities are more reflective of distorted market conditions than of stronger sovereign credit profiles,” said Fitch Ratings.
Still, investors have been encouraged by Greece’s new “reform-oriented government” and its “substantial” cash balances, said Vamvakidis.
This could be seen in a narrowing in the difference between yields on German bonds relative to Greek bonds, he said.
“The profile of Greece’s general government debt is exceptionally favorable,” Fitch Ratings said.
Greece’s economy is expected to grow by 2.1% in 2019, even as other European economies slip into recession. The country recorded positive manufacturing activity in September, while Europe as a whole posted a negative reading.