A positive outcome to negotiations between Greece and its creditors could spur a return of benchmark covered bond issuance next week, bankers said today (Thursday) as the Eurogroup reopened talks, but they warned of a quiet summer if a 30 June repayment deadline is missed.

Eurozone ministers entered new negotiations in Luxembourg today, after IMF managing director Christine Lagarde said Greece would be considered to be in default with the fund if a repayment of around Eu1.5bn is not made to the IMF by the 30 June deadline.

In a week in which only one euro benchmark covered bond has been sold – a Eu500m seven year from HSH Nordbank on Monday – bankers attributed a lack of demand for paper and issuers’ reluctance to enter the market to the ongoing uncertainty over the possibility of a Greek exit from the Eurozone.

Bankers said a solution, or at least more information on the negotiations, was needed to bring issuers and investors back to the covered bond market.

“We need definition,” said one. “We need to have some more clarity – on what is going on within the negotiations, what the next steps area – rather than just going from deadline to deadline.

“Right now, issuers have adopted a wait and see approach and investors are not keen to put their money to work when there is such a significant threat overhanging the market.”

The banker added that he believes market conditions would improve if the 30 June repayment is made, and be more supportive for new issuance.

“The Greece story will probably go on, but we will have more certainty,” he said. “If there is a positive newsflow, we could see issuers tap the market next week as there are many waiting, and you just don’t know whether things are going to get worse after that end of the month deadline.”

Another banker agreed, stating that he expects a busy summer on the primary market if a deal is reached, citing increased redemptions as supporting issuers.

“If we have a resolution, then the market will rally and people will go back into risk on mode,” he said. “If the payment is made at the end of June, then after we have massive redemptions loading up investors with cash all month, in my eyes we will have a busy summer.

“The pipeline is bigger than it has been in a long time.”

One syndicate official said he believes issuers could launch new deals as soon as next week regardless of the outcome of today’s talks, provided broader market conditions are stable.

“It is not so much the fundamental situation that is stopping deals being done,” he said. “The fundamental situation is as miserable as ever – that hasn’t changed.

“It is mostly a psychological situation that means investors do not feel like buying, and that will change and we will see deals done, macroeconomics permitting.”

However, bankers said that primary market activity would likely be further disrupted or cease entirely – in the short term – if Greece misses its 30 June deadline – the likelihood of which should is expected to become clear in the coming days.

“If Greece defaults we all go home – in the immediate term, at least,” said one. “No one really knows what will happen. There is no set, defined way to leave the EU.

“With that uncertainty, things will be very volatile and no one will go anywhere near the market for a while. It would be a long summer holiday.”

Some bankers argued that the market could still be viable in a default scenario, but said the new issue premiums required to build a trade would temporarily rise, after having already been seen as increasing to around 8bp-10bp in recent weeks.

“Whether issuers will be willing to pay that much, we will have to see,” said one. “We will also have to adapt for a while, to go from assuming there will always be multiple windows for issuance to monitoring the market on a day by day basis.

“But then we are already doing that, to an extent.”

Meanwhile, analysts at DZ Bank also attributed recent spread widening in covered bonds to investor uncertainty regarding Greece, and said this trend would be likely to continue if the probability of a Greek default increases, with the covered bonds spreads of peripheral issuers likely to widen disproportionately.

“If the Greek crisis ultimately leads to Greece’s exit from the Eurozone and thus to major upheavals in the government bond sector, we assume that spreads in the entire covered bond segment will widen considerably,” they added.

“However, in our opinion, the spread-widening will probably be disproportionately low relative to corresponding government bonds, as covered bonds are currently viewed as the most crisis-proof investments.”

The analysts cited the fact that Spanish and Italian covered bonds hardly reacted to the latest spread widening of domestic government bonds at the long end of the curve as supporting this opinion.