Greece to Sell Bills With Two-Year Note Yields Exceeding 20%: Euro Credit
Greece plans to sell 1.25 billion euros ($1.78 billion) of 13-week Treasury bills today as growing speculation the country will need to restructure its debt pushed bond yields to euro-era records.
Greece’s two-year bond yield exceeded 20 percent yesterday, as official denials that the nation was preparing a restructuring failed to convince investors. The yield on 10-year debt has jumped more than 300 basis points since Feb. 15 when Greece last sold 13-week bills at a yield 3.85 percent.
“Price actions in the market suggest people believe there’s no smoke without fire,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “Greece will keep rolling over the bills even though the costs of doing so may be rising.”
German Finance Minister Wolfgang Schaeuble’s comments on April 14 that Greece may need to restructure its debt sent bonds tumbling across peripheral Europe. The slide reversed the gains of the previous week triggered by optimism that contagion from the region’s debt crisis had been contained with Portugal’s bailout request.
Schaeuble said that his comments were misinterpreted, though German officials continued to speak of restructuring as recently as yesterday. “The big question is: will Greece make it through summer without buckling and having to find some means of restructuring its debt,” said Otto Fricke, the parliamentary budget spokesman for Chancellor Angela Merkel’s Free Democratic Party coalition partner. “The signs aren’t good.”
Greek government spokesman George Petalotis yesterday “categorically” denied reports in newspapers, including Eleftherotypia, that Greece has asked the International Monetary Fund and the European Union, which have provided the country with a 110 billion-euro package of loans, to extend the maturities of all the country’s debt.
Additional budget measures and state-asset sales announced April 15, amounting to 76 billion euros, are “the map for the country’s exit from the crisis,” Petalotis said.
His comments echoed those of Finance Minister George Papaconstantinou who said at an IMF meeting in Washington on April 16 and April 17 that restructuring is “simply not on the cards.” Greece also found support from IMF Managing Director Dominique Strauss-Kahn and French Finance Minister Christine Lagarde, who denied such steps were in the works.
Investors remained skeptical, and the additional yield investors demand to hold Greek 10-year debt instead of equivalent German securities yesterday surpassed 1,100 basis points for the first time since before the euro’s debut in 1999. The cost of insuring Greek sovereign debt jumped 101 basis points to a record 1,256, according to CMA prices for credit- default swaps. That indicates there’s a 65.8 percent probability of default within five years.
Mounting concerns about restructuring lifted borrowing costs for Spain at an auction yesterday. The Treasury sold 3.5 billion euros of 12-month bills at an average yield of 2.77 percent, compared with 2.128 percent at the previous auction on March 15.
“Given the current environment and the negative news flow from the periphery, some volatility into the auction and a weaker-than-usual result aren’t a big surprise,” Chiara Cremonesi, a fixed-income strategist at UniCredit, wrote from London yesterday.
Greece has only sold 26-week and 13-week bills since getting the EU-led bailout in May 2010. The last 52-week note was sold on April 13, 2010, 10 days before Prime Minister George Papandreou requested the aid and began talks with the EU and IMF. That issue was sold at 4.85 percent. Greece last week raised 2 billion euros selling 26-week bills that were priced to yield 4.8 percent.
Greece’s refinancing needs this year of 58 billion euros are covered by the EU-IMF loan package. The big challenge comes next year. Under the aid plan, Greece is due to regain market access and refinance at least three-quarters of its maturing medium- and long-term debt, and then fully fund debt rollovers from the summer of 2013.
Greek 10-year yields have risen almost 200 basis points this year and have gained about 400 basis points since Papandreou requested the bailout to bring down borrowing costs. The jump in yields has come even after EU leaders and the IMF agreed to extend the maturities and reduce interest rates on their loans.
Under changes made last month to the region-wide rescue fund, Greece may, “as an exception,” sell bonds directly to the region’s bailout fund, the European Financial Stability Facility, in 2012 if the nation is unable to tap markets next year. That possibility also exists for sales to the fund after 2012 so long as Greece remains in an aid program.
Benefit of Doubt
An outright debt restructuring that would reduce the net present value of debt is “a medium-term event, not a near-term event,” Deutsche Bank economists led by Thomas Mayer wrote in an April 15 note to clients.
“As long as the Greek government and people remain constructive about delivering the fiscal consolidation, privatization and structural reforms, the EU and IMF have an interest in giving them a benefit of the doubt,” Mayer wrote. “The most likely outcome is Greece’s return to the market in 2012 is back-stopped by the EFSF, in exchange for additional austerity.”
The IMF said in its March report that Greece’s debt was sustainable under the program although large risks remained, including from an increase in so-called contingent banking liabilities. That analysis said a banking shock would push debt to more than 200 percent of gross domestic product. Greek banks remain frozen out of markets and challenges are mounting as the recession deepens, the EU and IMF said.
A debt restructuring “would have disastrous consequences for the access of the government and of Greek enterprises to international financial markets, as well as a very negative effect on the assets of pension funds, banks and individuals,” Bank of Greece Governor George Provopoulos, who’s also a council member of the European Central Bank, said in a speech yesterday in Athens.
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