Greek Bonds Show Waning Faith It Can Avoid Bailout (Update4)

Jan. 29 (Bloomberg) -- Greece is losing the confidence of bondholders that it will reduce the largest budget deficit in the European Union amid increased speculation that the country won’t be able to meet its debt obligations.

The nation’s government bonds are the world’s worst performers in January, losing 6 percent in local currency terms and extending their decline over the past three months to more than 11 percent, Bloomberg/EFFAS indexes show. Credit-default swaps tied to Greece trade at about the same levels as Dubai when it got a $10 billion bailout from Abu Dhabi in December. Greek 10-year bonds rebounded today after EU Monetary Affairs Commissioner Joaquin Almunia said the country won’t default.

“There’s a lot of self-fulfilling prophecy, because if you follow the market and sell Greece off then the probability that external help is needed will rise,” said Christoph Kind, the Frankfurt-based head of asset allocation at Frankfurt Trust, which manages about $20 billion. “We will have to see an official statement from EU officials or the European Central Bank on how they can show their support for Greece.”

The German and French governments denied a report yesterday in the newspaper Le Monde that European Union member states are examining ways to provide assistance. Prime Minister George Papandreou said the country doesn’t need to borrow from European nations.

Greece’s bonds have slumped on concern the government isn’t acting quickly enough to plug a budget deficit that was almost 13 percent of gross domestic product last year, more than four times the EU’s limit. The European Commission said Jan. 27 that Greece hasn’t done enough to tame the shortfall.

No ‘Plan B’

EU policy makers have no “plan B” to help Greece, Almunia said today.

“There is no bailout problem,” the bloc’s top economic official said in an interview with Bloomberg Television at the World Economic Forum’s annual meeting in Davos, Switzerland. “Greece will not default. In the euro area, default does not exist.”

The yield on two-year Greek notes rose for a fourth straight day, increasing 48 basis points to 5.70 percent as of 4:58 p.m. in London. Ten-year yields dropped 27 basis points to 6.88 percent, after climbing to 7.15 percent yesterday, the highest level since October 1999 and up from 4.99 percent on Nov. 30. The yield is 3.69 percentage points higher than benchmark German bunds, after widening to 3.96 percentage points yesterday, the most since October 1998.

‘Clock Is Ticking’

Credit-default swaps on Greece fell to 397 basis points, from a record-high 422.5 basis points yesterday, CMA DataVision prices show. Swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is equal to $1,000 a year on a contract protecting $10 million of debt.

The swaps have risen from 121.8 basis points in October, and compare with 433.4 basis points for Dubai in the weeks before it received cash from Abu Dhabi on Dec. 14.

The MSCI World Index of shares fell 0.4 percent today, its eighth-straight decline, and the euro fell to the lowest level against the dollar since July. Yu Yongding, a former adviser to China’s central bank, yesterday said the government shouldn’t buy a “large chunk” of Greek debt with its $2.4 trillion in reserves because it is more risky than U.S. Treasuries.

“I am not sure that a Greek default is inevitable, but the clock is ticking with regard to difficult policy choices,” Marc Seidner, a portfolio manager at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mailed response to questions.

Greek Rumors

Financial aid from other European nations would be conditional upon the government introducing new measures to clean up its finances, Le Monde said. Help would consist of bilateral loans from European governments in the absence of a mechanism for a euro-region bailout, the newspaper said.

“There is absolutely nothing to these rumors,” German Finance Ministry spokeswoman Jeanette Schwamberger said in an e- mailed statement from Berlin. A French Finance Ministry official in Paris also denied the story. ECB President Jean-Claude Trichet said in an interview in Davos, Switzerland, he’s “confident” Greece will take the right steps.

Greece is being victimized by rumors in financial markets, Papandreou said in an interview yesterday in Davos.

“Rumors can overtake the international markets,” he said. “This is, of course, unfair.”

‘Buffer’ Greece

Being a part of the euro has helped “buffer” Greece from an even more drastic reaction in markets, Papandreou said. Greece is determined to meet the EU’s deficit-reduction goals on its own, and the Greek people understand that “painful” measures are needed to cut the shortfall, he said.

The bonds of other so-called peripheral European nations dropped. The yield premium investors demand to hold Portuguese bonds instead of bunds increased 17 basis points to 122 basis points yesterday, and was at 121 basis points today. Moody’s Investors Service said yesterday Portugal needs a “credible plan” to avoid “further downward pressure on its ratings.”

Spreads between Spanish and German debt climbed 8 basis points to 98 basis points yesterday before dropping to 92 basis points today. The Italian-German spread rose 6 basis points to 94 basis points, and was at 91 basis points today.

“Greece is the canary-in-the-coal-mine for the entire sovereign risk concern, but the problem goes beyond Greece to all high-debt, high-deficit sovereigns” Seidner said.

‘Corporates as Well’

Investor concern that Greece can’t tackle its budget deficit is hurting the debt of national utility companies and banks, said Philip Gisdakis, head of credit strategy at UniCredit SpA in Munich.

“If you fear a Greek crisis then you should not only avoid government bonds but corporates as well,” Gisdakis said. “And if you fear Greece, you should also fear Portugal and Spain.”

Contracts on National Bank of Greece increased to 420 basis points from 373 basis points. Energias de Portugal climbed to 113 basis points from 109 basis points, CMA prices showed yesterday.

“The trend is for wider spreads, and it’s difficult to go against the trend at the moment,” said Wilson Chin, a fixed- income strategist at ING Groep NV in Amsterdam. “The market is looking for some kind of development.”

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Keith Jenkins in London at Kjenkins3@bloomberg.net

To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net