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Greek Government Bonds Slump on Default Concern; Merkel Rally Trims Drop

Greek bonds plunged, driving yields on the nation’s two- and 10-year securities to records, as Prime Minister George Papandreou’s failure to win parliamentary support for more austerity fueled speculation of a default.

Greek 10-year bonds fell for the second consecutive week, driving the yield difference, or spread, between the securities and similar-maturity German bunds to an all-time high. The debt rallied yesterday after German Chancellor Angela Merkel retreated from German demands that bondholders be forced to bear a “substantial” share of a new rescue for Greece. Standard & Poor’s cut Greece’s credit rating to CCC from B on June 13.

“There are still concerns that the Greek situation won’t get sorted,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “The overwhelming concern over possible contagion is weighing on Portugal and Ireland.”

The Greek 10-year yield rose 21 basis points in the week to 16.94 percent as of 5 p.m. yesterday in London after reaching a euro-era record 18.35 percent earlier. The spread versus benchmark bunds widened to as much as 1,543 basis points, or 15.43 percentage points. Greece’s two-year note yield climbed 284 basis points to 28.79 percent. It reached a record 30.32 percent on June 16.

Ireland and Portugal’s bond yields also reached records, while the costs of insuring Greek, Irish and Portuguese debt against default reached all-time highs.

A default by Greece is “almost certain,” former Federal Reserve chairman Alan Greenspan said June 16.

Default Chances ’Small’

Merkel will work with the European Central Bank to avoid disrupting markets, she told reporters in Berlin yesterday at a joint press conference with French President Nicolas Sarkozy.

German two-year note yields dropped three basis points in the week to 1.51 percent. They reached 1.43 percent on June 16, the lowest level since Feb. 22, as investors sought the euro area’s safest assets. Ten-year bund yields were little changed at 2.96 percent after falling to 2.91 percent on June 16, the least since Jan. 11.

A gauge of German business sentiment fell in June according to economists surveyed by Bloomberg News before the Ifo institute in Munich releases its business climate index on June 24.

Greek government bonds have lost investors 20 percent this year through June 16, while Portuguese debt declined 19 percent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Irish securities dropped 11 percent, while German debt, perceived to be the safest in the region, returned 0.7 percent. Treasuries gained 3.4 percent, the indexes show.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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

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