Greece On The Brink As Bond Rates Surge To Record Highs

¹²Greece On The Brink As Bond Rates Surge To Record Highs

George Papandreou, the Prime Minister of Greece. The country is making every effort not to borrow at "barbaric" interest rates




By Carl Mortished, World Business Editor | 9 April 2010

Greece was pushed closer to the edge by a panicky bond market yesterday, which ramped up the cost of its borrowing to new highs. A hammering of bond prices by investors took the yield on short-term Greek debt as high as 8 per cent at one point, prompting speculation that a rescue might be imminent. The volatile bonds movement prompted the European Central Bank to ease the pressure on Greece's troubled domestic lenders, who have seen €8 billion flow from their coffers in recent weeks.

The ECB said that it would prolong a loosening of the rules on using government bonds as collateral for its loans. Bond market analysts believe a rescue is almost inevitable if yields continue to climb as they did yesterday. The two-year bond rose by a full percentage point to more than 8 per cent.

Chris Pryce, a sovereign bond analyst at Fitch Ratings, said that Greece needed to ask for help. "There is still a lack of clarity and confusion about what they intend to do, when they intend to do it and how much would be involved," he said. "It is now up to the Greek Government to go publicly to the EU and IMF and ask for the cash and support."

George Patalotis, a spokesman for the Greek Government, insisted, however, that the aid mechanism did not need to be activated "for the time being". He said: "We are making every effort under difficult circumstances not to be forced to borrow under barbaric terms". Jean-Claude Trichet, the ECB chairman, was at pains yesterday to dispel any doubts about Greece's solvency.

Mr. Trichet denied the extension of looser collateral rules was aimed at Greece. "Taking all the information I have, default is not an issue for Greece". But his comments were not enough to calm bond and share markets, which suffered a sharp sell-off yesterday in response to the Greek scare.

Bond market analysts said that the volatility at the short-end of the debt market was evidence that Greece would struggle to raise cash at anything but extortionate rates— signs of a brewing liquidity crisis. Athens needs to redeem about €20 billion in maturing bonds over the next month or two. Recent attempts to raise cash did not bode well, said one analyst.

"The seven-year bond deal last week performed poorly. If yields are going up between 50 and 100 basis points every day it is likely they will have to seek help," one analyst said. The surging yields suggest that Greece would be forced to pay a huge premium to tempt bond investors— rates which the Greek Finance Minister has said the country could not afford.

Many investors doubt that the Government will find takers willing to put up enough money so that it can pay off old debts. Yesterday the spread— or difference— between Greek ten-year notes and equivalent German government bonds rose by half a point to 4.63 percentage points, a record. Panagiotis Dimitropoulos, treasurer at Millennium Bank in Greece, said: "Spread levels today are insane; they are not levels for a eurozone country. It seems Greece is being pushed towards the aid mechanism."

Financial markets are testing the resolve of eurozone leaders who only a fortnight ago pledged to make funds available to Greece, in conjunction with the International Monetary Fund, if the country was unable to borrow on the commercial bond markets. However, no structure has been agreed over the proposed rescue and the role of the IMF, whose officials visited Greece this week, remains unclear. Germany is reluctant to take part in a bailout, arguing that Greece must first put its house in order.

Athens has pledged to reduce its public sector deficit from 12.7 per cent last year to 8.7 per cent this year. However, it may be forced to rewrite its budget if it has to refinance its borrowings at current market interest rates.