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Greek Yield Rises Over 100%, Italian Bonds Drop on EU Ultimatum

Greek two-year yields surged above 100 percent for the first time after European leaders suspended aid to the nation until it holds a referendum next month on its bailout that will determine whether it stays in the euro area.

The extra yield investors demand to hold 10-year Italian and French debt instead of similar-maturity bunds widened to euro-era records. The European Central Bank’s governing council meets today for the first time under new president Mario Draghi and Group of 20 leaders gather in Cannes, France. BNP Paribas SA said quarterly profit slumped 72 percent because of a writedown on Greek bonds and losses from selling European government securities. Spain and France auctioned debt today.

“If it was only about Greece then things would still be controllable, but this is really about the contagion impact on other euro members and in particular Italy,” said Elwin de Groot, senior market economist at Rabobank Nederland in Utrecht, Netherlands. “The market doesn’t want to wait any longer. It wants to see quick results.”

The two-year Greek yield jumped 10.58 percentage points to 107.16 percent at 10:44 a.m. London time, the highest since Bloomberg began compiling data on the securities in 1998. The 4 percent note due in August 2013 fell 2.80, or 28 euros per 1,000-euro ($1,371) to 29.81 percent of face value.

The rate on the Greek bond maturing in October 2022 climbed 116 basis points, or 1.16 percentage point, to 26.63 percent.

‘Look at the Price’

“You don’t have to look at the yield, only the price,” said Alessandro Giansanti, a senior interest-rate strategist at ING Groep NV in Amsterdam. “What the market does when you have a distressed situation is look at the price -- that’s what investors think they will get in a restructuring.”

Crisis talks ended in Cannes yesterday with German Chancellor Angela Merkel and French President Nicolas Sarkozy withholding 8 billion euros of assistance to Greece and warning it will surrender all European aid if the nation votes against a bailout package agreed on last week. A Group of 20 summit is also set to begin today in the French resort.

Greek Prime Minister George Papandreou pledged Oct. 31 to hold a referendum on the region’s plan to write down the nation’s debt and the accompanying austerity measures, risking default if voters reject the deal.

“There is a chance this could end well despite the fact it looks bleak now,” said Justin Knight, a European rate strategist at UBS AG in London. “As long as we get the right result out of the votes, one which gives a mandate for austerity, what we’re looking at in the longer-term might be quite positive. The trouble is right now it’s creating a great deal of uncertainty.”

Bunds Fall

The 10-year German bund fell for a second day with the yield rising four basis points to 1.87 percent. The rate dropped to 1.73 percent on Nov. 1, the lowest since Oct. 5. The two-year yield climbed two basis points to 0.45 percent.

Italy’s Prime Minister Silvio Berlusconi, under mounting pressure to overhaul the nation’s economy, is going “to Cannes empty-handed,” Il Sole 24 Ore said in an editorial. The Cabinet last night only agreed on a “mini-plan” to fight the debt crisis, rather than accelerating a promised economic revamp through an emergency decree, the Milan-based newspaper said.

Italian 10-year yields rose 10 basis points to 6.29 percent, after climbing to 6.40 percent. That difference in yield with German securities widened to as much as 462 basis points. The spread between French and German 10-year securities reached a euro-era record 141 basis points.

‘Very Fragile’

“Spreads have been trading wider,” said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich. “The news out of Greece keeps everything very fragile.”

ECB policy makers will leave the benchmark interest rate at 1.5 percent, according to the median estimate of 55 economists surveyed by Bloomberg News. Four predict a 25 basis-point reduction, while two forecast a 50 basis-point cut.

Spain sold 4.49 billion euros of debt, in line with its maximum target, and demand fell at the auction of securities maturing in 2014 and 2016. Investors submitted bids for 1.62 times the amount of five-year debt on offer, compared with 1.76 times when the notes were last auctioned.

France sold 7 billion euros of 2017, 2021 and 2026 bonds. The average yield on the 10-year bond was 3.22 percent, compared to 2.72 percent at the previous auction on Oct. 6.

Bank Writedowns

BNP Paribas, the largest foreign holder of Italian sovereign debt, reduced by 8.3 billion its banking-book holdings of debt from the euro area’s third-largest economy between the end of June and the end of October, the bank said today. The French firm booked a 2.26 billion-euro pretax writedown on Greek securities and cut its total sovereign debt portfolio by 23 percent at the end of October.

KfW Group, Germany’s state-owned development bank, wrote down its Greek government debt holdings to 45 percent of their nominal value, Handelsblatt reported, citing people familiar with the matter. ING Groep NV, the biggest Dutch financial-services company, wrote down its holdings of Greek securities to market value as of Sept. 30, representing a reduction of about 60 percent, it said today.

German bonds have returned 8.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt lost 46.9 percent.

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