Greek Notes Gain as IMF, EU Move Closer to $158 Billion Aid

Dominique Strauss-Kahn of the IMF
Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), participates in a panel discussion on the global economic outlook during day four of the 2010 World Economic Forum (WEF) annual meeting in Davos. Photographer: Chris Ratcliffe/Bloomberg

Greek two-year government notes rebounded as policy makers signaled Greece may get enough financial aid to help the country manage its debt burden and avoid a default for three years.

International Monetary Fund Managing Director Dominique Strauss-Kahn told German lawmakers Greece may need as much as 120 billion euros ($158 billion), Green Party spokesman Michael Schroeren said today. That’s almost three times the 45 billion- euro value of the aid package proposed for 2010. Germany may be able to make a final decision on aid for Greece as soon as May 7, when the upper house of parliament could approve a support package, Finance Minister Wolfgang Schaeuble said.

“It stopped the rot in Greek government bonds,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors. “This will cover Greece’s needs not just for this year, but also for 2011 and 2012. It will allow Greece breathing room to tackle its awful fiscal position and it looks more likely than not that Germany will support Greece. The quicker they put the cash in place, the better.”

The two-year Greek note yield fell 164 basis points to 17.35 percent as of 4:34 p.m. in London after earlier soaring as high as 26 percent. The 4.3 percent security due in March 2012 rose 270, or 20.70 euros per 1,000 -euro face amount, to 80.44.

“It’s completely clear that the negotiations between the Greek government, the European Commission and the IMF need to be speeded up now,” German Chancellor Angela Merkel told reporters in Berlin today. “We hope that they can be completed in the next few days.”

‘Relieved Reaction’

The German two-year note yield was 1 basis point higher at 0.78 percent as demand for the safest European fixed-income assets faded after Strauss-Kahn briefed German deputies in Berlin. It pared a decline that sent the yield down to 0.86 percent after Standard & Poor’s lowered Spain’s debt rating one step to AA from AA+.

The 120-billion-euro figure suggested the IMF is discussing three years of aid, prompting a “relieved market reaction,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “It seems this solution was the best that could be made in a very short period of time.”

Greek bonds had plunged earlier, leading declines among the securities of Europe’s most indebted nations, as credit downgrades for Greece and Portugal yesterday dented investors’ confidence in their ability to pay their debt.

Junk Rating

Greece’s credit rating was cut three steps to junk by S&P yesterday, the first time a euro member has lost its investment grade since the currency’s 1999 debut.

The nation was lowered to BB+ from BBB+, putting Greek debt on a par with bonds issued by Azerbaijan and Egypt. It came minutes after the rating company reduced Portugal by two steps to A- from A+.

Portugal’s two-year note was little changed, with the yield at 5.30 percent. Irish two-year notes fell, with the yield 30 basis points higher at 4.05 percent. Italy’s two-year note yield advanced 38 basis points to 2.19 percent, and Spain’s climbed 10 basis points to 2.19 percent.

“The question now is what this means for other countries,” Purps said.

Greek 10-year bonds stayed lower, with the yield up 43 basis points at 10.48 percent, on lingering concern the rescue package may falter.

Resistance from German opposition politicians “underlines the risk the extension of this aid may yet hit additional snags,” Richard McGuire, a senior fixed-income strategist at Royal Bank of Canada Capital Markets. said today in an e-mailed note. Still, “With the EU and IMF clearly upping the aid ante here, there is scope for a further narrowing of peripheral yields and an underperformance of bunds,” he said.