Cost of Greek debt soars

EU-IMF financial support for Greece fails to reassure bond markets.

Eurozone governments are today coming under increasing pressure to quickly release emergency loans to Greece, as opinion hardens on the markets that Greece will not be able to honour its debts.

The Greek government’s announcement on 23 April that it will seek emergency support from the eurozone and International Monetary Fund has failed to stem a sharp rise in the interest investors charge on Greek government debt, or the cost of insuring it.

Yields on Greek two-year bonds this morning climbed to almost 14%, a record high for the eurozone, and higher than the yields charged to Argentina (which defaulted on its debt in 2001), Venezuela and Pakistan.

Yields on ten-year bonds reached 9.83%, over 670 basis points higher than those on German bonds, the benchmark rate for the eurozone. Three weeks ago, yields on ten-year bonds were at an, already high, 7.4%.

The spike in yields suggests that investors are pricing in a debt restructuring – that is, they are assuming that Greece will seek to negotiate a reduction or deferral in its obligations to investors – and that they do not believe that the eurozone can or will prevent restructuring.

The cost of insuring €10 million of Greek debt with credit default swaps has jumped by €100,000 since Friday. 

Thomas Mayer, chief economist for Deutsche Bank, today described the rising yields as an “insolvency death trap”.

Germany’s stance

The mood on the market has not been helped by a tough message from the German government that it will only provide financial support if Greece commits itself to tough economic restructuring measures. Angela Merkel, Germany’s chancellor, said yesterday that Greece “must do its homework” before getting financial aid.

The German parliament, which must vote to approve any aid, will be briefed about Greece’s situation on Wednesday by Dominique Strauss-Khan, the IMF’s director-general, and by Jean-Claude Trichet, the president of the European Central Bank. Both Strauss-Khan and Trichet will urge the parliament to quickly approve aid to prevent Greece’s situation from becoming any worse.

Emergency loan facility

Officials from the European Commission and IMF are in Athens negotiating with the Greek government on the restructuring programme it will implement in exchange for support.

Marco Buti, the Commission’s director-general for economic and financial affairs, said today that the programme would be finalised in the next few days, and would be designed to ensure that Greece meets its obligations to investors.

“There is not going to be a default, there is not going to be debt restructuring as part of the programme,” he said.

“Having a programme will help a lot in [providing] stability and reassuring markets,” he said. He said that it would be a “very serious programme of adjustment”, spanning at least three years.

He said that it is “a question of days” before member states complete all the internal procedures necessary for the provision of financial support.

Ministers agreed on 11 April to set up an emergency loan facility, funded jointly by the eurozone and IMF, as a response to Greece’s debt crisis. It would provide finance to Greece at rates substantially lower than it is currently paying on the markets. The programme is expected to last for three years, with the eurozone providing around two-thirds of the total support. The facility’s budget for 2010 is around €45 billion, with €30 billion to be provided by the eurozone and €15 from the IMF. Germany would contribute €8.4bn, the largest single contribution from the eurozone.

Daniel Gros, director of the Centre for European Policy Studies, said that the loan facility was a “recipe, in my view, for potential political disaster”.

“Market participants don’t think it would work,” he added.

Gros said that the facility was unlikely to restore Greece’s fiscal health, and member states would face difficult decisions after 2010 on whether to provide more support or to allow Greece to default. “When that [€45 billion] is used up you cannot refuse the next tranche,” he said. “Whoever said no would be responsible for a catastrophe,” he added, warning that “this could be the end of political union in Europe”.

Gros is advocating that Greece negotiate with its creditors on a five-year deferral of payment.

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