Sovereign risk manager of the year: Greece’s Public Debt Management Agency

Risk Awards 2024: Skilled navigation of interest rate rise helps restore investment grade rating

Dimitrios Tsakonas

For most borrowers, a sharp rise in interest rates is a cause for concern. But for Greece’s Public Debt Management Agency, the past year has instead been used as an opportunity to improve its long-term debt sustainability.

The clearest demonstration of that came in September, when rating agency DBRS upgraded the sovereign to BBB, marking its return to investment grade more than a decade after the private sector involvement debt restructuring and international bail-out of 2012. The following month, S&P followed suit with an upgrade to BBB-minus.

“The happiest day of my professional life was the eighth of September, when DBRS provided us with the investment grade status,” says Dimitrios Tsakonas, director general of the PDMA.

The upgrades were driven partly by the – at times severe – fiscal adjustment programme over the past decade, which has enabled the country to consistently generate a primary budget surplus and steadily reduce its general government debt as a share of gross domestic product (GDP).

However, the PDMA itself is also a key part of the upgrade story. DBRS mentioned its “proactive” approach to debt management, while S&P noted the PDMA’s “extensive swaps program is expected to reduce Greece’s debt financing needs by about €1.2 billion in each of the coming years”.

The happiest day of my professional life was the eighth of September, when DBRS provided us with the investment grade status

Dimitrios Tsakonas, PDMA

The upgrade has an immediate benefit for the local financial sector: banks can now use Greek government bonds (GGBs) as collateral to access repo facilities at the European Central Bank.

“We eliminated the liquidity risk. As soon as DBRS gave us the BBB status, automatically our GGBs were eligible for liquidity purposes, so we don’t run any more liquidity risk in the whole Greek economy,” says Tsakonas.

Even without an investment-grade rating, the Hellenic Republic had already re-established itself as a trusted sovereign issuer in the capital markets. In 2021, Greece issued its first 30-year sovereign bond in 14 years, in an auction that was eight times oversubscribed, according to Tsakonas. Nonetheless, the upgrade is helpful for the sovereign’s access to derivatives markets, because it reduces the credit risk Greece poses to its swap counterparties.

“Everybody wants to do transactions with the Hellenic Republic now. This wasn’t the case five years ago,” says Tsakonas.

Debt to GDP is still high, at 166.5% in June 2023, although that is down sharply from a peak of almost 210% of GDP in March 2021, in the immediate aftermath of emergency spending during the Covid pandemic. Both rating agencies and the multinational partners that provided Greece with emergency official sector financing in 2012 still keep a very close eye on how its debt sustainability is progressing.

Beyond the ESM

The PDMA had already hedged some of the interest rate risk on the floating rate Greek Loan Facility (GLF) – a deal that prompted an earlier award from Risk.net in 2018. Combined with long-term fixed-rate lending from the European Stability Mechanism, this leaves Greece with a general government debt of just over €356 billion at the end of 2022 – more than 70% of it owed to official sector creditors – which has an average life of 19.7 years, and is now entirely fixed-rate after derivatives transactions.

As a result, the main focus of the ESM and the International Monetary Fund is on what happens when the official sector loans begin to roll off. Their debt sustainability analysis assumes financing costs will rise to 4.1% on average out to 2060 – consisting of a 2.1% risk-free rate and a 200 basis point credit spread – compared with just 1.2% today.

“We are done with the first 20 years of our future, [but] what about the next 20 years?” says Tsakonas.

We are done with the first 20 years of our future, [but] what about the next 20 years?

Dimitrios Tsakonas, PDMA

As eurozone rates rose during 2022, the PDMA saw an opportunity in the steep inversion of the yield curve. At one stage, while the front end was climbing towards 4%, 20-year swap rates were still at minus 35bp. Tsakonas’s team therefore proposed a 20-year, 20-year forward-starting swap, to lock in low rates today for when the ESM lending matures.

“We have a benchmark approach, we don’t follow 100% liability-by-liability the structure of each one of the debt securities or loans that we have in place outstanding,” says Tsakonas. “So we say our debt looks like a bond with twenty years maturity, fixed rate.”

It took time to discuss the transaction with all the PDMA’s stakeholders – the Greek government, EU partners, credit rating agencies and investors. Around six months passed before the PDMA was able to begin entering into the trade in mid-year, and by then, the 20-year rate had risen to 65bp.

“We had a target of €10 billion because we are talking about ultra-long maturities, so it wasn’t very easy to find counterparties, so we were very conservative,” says Tsaksonas.

To reassure those counterparties and reduce all-in costs, the PDMA also agreed to bilateral, cash collateral credit support annexes (CSAs). This is something the agency has been reluctant to consider in the past, because as Tsakonas puts it: “We do not want to put at risk the cash reserves of the Hellenic Republic.” To limit their risk to the PDMA, the CSAs themselves are forward-starting, and “only addressed to these specific trades,” he explains, rather than covering the larger portfolio of swaps dating back to 2018.

By the time the whole trade had been executed at the start of 2023, the 20-year swap rate had risen to around 1.8%. That left the PDMA with an average all-in cost of around 1.1%, which was “still fine, well below that 2.1% risk-free rate assumption” in the debt sustainability analysis, Tsakonas points out.

Looking in the mirror

By 2021, the PDMA’s interest swap programme started in 2018 had effectively swapped out all of the residual floating rate risk on the €53 billion outstanding GLF debts. Following the benchmark approach, this swap programme did not match the exact maturity profile of the underlying debts, but instead had an average maturity of 11 years. Some of the floating rate debt has amortised, and in December 2022, the PDMA made an early repayment of €2.7 billion. The following July, newly re-elected prime minister Kyriakos Mitsotakis pledged to make another early repayment of €5.3 billion by the end of 2023.

After that repayment, the outstanding GLF debt will be down to €39 billion, and the sovereign will therefore have €14 billion of what Tsakonas refers to as “naked” pay fixed, receive floating swaps, that are no longer hedging any underlying debt.

“Our float-fixed component is 105%, or minus 5% of floating – it’s not the mainstream portfolio analysis and management,” Tsakonas observes wryly.

The PDMA could simply close out these swaps, which are substantially in the money, and transfer the proceeds into cash reserves. Here again, however, the rise in rates presented an opportunity for something more durable – to reduce the sovereign’s net financing needs for the residual nine-year duration of the swaps.

Our float-fixed component is 105%, or minus 5% of floating – it’s not the mainstream portfolio analysis and management

Dimitrios Tsakonas, PDMA

To do this, the agency executed a series of mirror swap trades with the same maturities, paying floating and receiving fixed. The floating rate liability is exactly matched by the rate the PDMA receives on the original swaps, so what matters is the difference between the fixed rates paid on the trades entered between 2018 and 2021, and received on the new mirror trades. That fixed rate has risen from 1% when the original trades were entered into in 2018, to around 4% today.

“We are going to counterbalance in cashflow terms any increase in the future servicing cost of our debt by incorporating all of this mark-to-market as a kind of annuity for the future cashflow,” says Tsakonas.

In fact, it’s an even better deal than it looks at first sight. To reduce counterparty credit risk for the dealers who provided the original swaps, the PDMA partly prepaid the fixed rate component, so it will soon owe nothing on the pay-fixed swaps.

“We are going to receive the three-month Euribor or six-month Euribor that at the current level is 4%, and we are going to pay zero, because we have already pre-paid the final five or six years’ interest payments,” says Tsakonas.

A large majority of Greece’s 14 foreign and four domestic primary dealers have participated substantially in its overall swaps portfolio. While the distribution of the trades – especially the forward-starting swaps – has been tilted towards the most active foreign dealers, the PDMA has tried to make sure the allocations are fairly evenly spread.

“Even if we need to pay slightly higher fees, we want to share all these transactions if possible equally between all counterparties, because we don’t want to run [concentrated] counterparty risk,” says Tsakonas.

No room for complacency

Tsakonas does not downplay the challenges ahead – or the sacrifices the country has made over the past decade. He sees the PDMA’s steady and skilled navigation of troubled waters over the past decade as a matter of necessity more than anything else.

“We had a ‘mission impossible’ to accomplish, and in such a case we were obliged to survive, to find a way out,” he says. “We haven’t reinvented the wheel, we just did the obvious and we still do the obvious.”

While the PDMA may have done a great deal to secure the sustainability and predictability of Greece’s future financing needs over the past 18 months, Tsakonas wants to go further. He’s a career public debt manager, having risen through the ranks at the PDMA since he joined as a graduate in the mid-1990s. He remembers the era when the Hellenic Republic sovereign rating was much more solidly investment grade.

“We’re just out of the water. For 15 years, we were deep under,” says Tsakonas. “Now we’ve taken a breath, but back to normality for me means an A grade rating.”