Greek, Portuguese Yields Surge to Record as Schaeuble Raises Restructuring

Greek and Portuguese bonds led a slump in the securities of Europe’s most indebted nations amid mounting investor concern that some may be forced to restructure their debts.

The declines pushed the yields on Greek and Portuguese 10- year bonds to euro-era records after German Finance Minister Wolfgang Schaeuble said that Greece may need to renegotiate its debt burden if an audit in June questions its ability to pay creditors. Standard & Poor’s head of European sovereign ratings, Moritz Kraemer, said the risk of such an event has risen. Greek two-year yields climbed the most since January 27.

“Schaeuble’s comments bring the prospect of restructuring back onto the table,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It gives the market plenty of time to fret. If we have to wait until June, there’s the prospect of event risk in the future, which leaves the market open to speculation and spread- widening.”

The yield on 10-year Greek debt jumped 36 basis points to 13.27 percent as of 4:38 p.m. in London, the highest since at least 1998 when Bloomberg began collecting the data. The two- year note yield surged as much as 103 basis points to 17.96 percent.

Portuguese 10-year yields added 14 basis points to 8.88 percent, after reaching 8.89 percent, the most since at least 1997. Two-year note yields were 26 basis points higher at 9.31 percent.

Schaeuble told Germany’s Die Welt newspaper that Greece may have to restructure because creditors can’t be forced to take losses until Europe’s permanent rescue system for the euro starts up in mid-2013.

Restructure not ‘Inevitable’

Speaking on Bloomberg Television’s “On The Move” S&P’s Kraemer said “I’m not saying restructuring is inevitable, but the risk is more likely. The base case is still that they would not restructure.”

Such an event could involve imposing losses of between 50 percent and 70 percent on investors, he said.

The cost of insuring Greek government debt rose 42 basis points to a record 1,102, according to CMA prices for credit- default swaps, signaling there’s a 60 percent chance the country will default within five years.

“That Greece may have no other alternative but to restructure in order to get itself back on the sustainable debt path is probably the worst kept secret,” said Greg Venizelos, a credit strategist at BNP Paribas SA in London.

Crisis ‘Ring-Fenced’

European Union Economic and Monetary Affairs Commissioner Olli Rehn said today in a Bloomberg Television interview with Sarh Eisen that a restructuring is “no solution” to the debt problems faced by Greece, and it is neither reasonable nor necessary.

Speaking earlier at an event in Washington, Rehn said he is “quite confident” the financial aid being negotiated for Portugal will result in the debt crisis being “ring-fenced.” The package should be in place “in a matter of weeks,” he said.

Yields on 10-year Spanish debt rose nine basis points to 5.32 percent, while the yield on Irish securities of a similar maturity jumped 25 basis points to 9.34 percent.

Fitch Ratings today affirmed Ireland’s credit rating at BBB+ and removed them from ratings watch negative, while maintain the outlook as negative.

Benchmark Italian debt also slipped after it sold 6.9 billion euros of bonds maturing in 2016 and 2023, pushing the 10-year yield up three basis points to 4.72 percent.

Worst Performing Debt

Portuguese debt is the worst performer this year among the euro-region nations, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. It has handed investors a 10.6 percent loss, while Greek bonds have lost 1.5 percent and German government bonds are 2.7 percent lower. Spanish debt has returned 2.8 percent and Irish securities 0.4 percent.

German bonds gained as investors sought the relative safety of debt issued by Europe’s largest economy, and the nation’s government announced new economic forecasts. The German economy will grow 2.6 percent this year and 1.8 percent in 2012, Economy Minister Rainer Bruederle said.

Unemployment will decline below 3 million on average this year, while inflation will average 2.4 percent, falling to 1.9 percent in 2012, the government said in its report released in Berlin today.

The European Central Bank said in its monthly policy statement today that it will monitor upside inflation risks “very closely” after raising interest rates last week for the first time in almost three years.

The yield on the benchmark 10-year bond was little changed at 3.43 percent, after earlier reaching 3.38 percent, the lowest since April 5. The two-year note yield was at 1.86 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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