Greek Bailout Exit Plan at Risk Amid Bond, Stock Selloff

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Greece's Prime Minister Antonis Samaras
Antonis Samaras, Greece's Prime Minister. Photographer: Kostas Tsironis

Greece’s plan to escape the shackles of the biggest bailout in history is at risk of falling apart.

A month of declines in stocks and bonds has pushed yields to a level that investors say threatens once again to cut Greece off from financial markets.

“The selloff in Greek bonds is signaling that Greece has lost market access,” Thanassis Drogossis, head of equities at Athens-based Pantelakis Securities SA, said in a telephone interview. “Investors fear that an early exit from the bailout programs may prove that fiscal improvement so far is unsustainable.”

A rally in Greek government bonds earlier this year emboldened Prime Minister Antonis Samaras, who announced plans to sever the 240 billion-euro ($307 billion) lifeline that has kept the country afloat since 2010. The bailout loans came with strict conditions on belt-tightening that exacerbated Greece’s worst recession on record and triggered a political backlash. Samaras’s plans may yet be derailed by the selloff.

Greek bonds have lost about 17 percent in the past month through yesterday, as measured by the Bloomberg Greece Sovereign Bond Index, making them the worst-performing government security tracked by Bloomberg. As during the debt crisis, the turmoil rippled out to other euro-area nations, with Spanish securities tumbling for a second day after Spain missed its maximum target in an auction of 10- and 15-year debt.

Yields Jump

Greek 10-year yields were up 72 basis points to 8.58 percent at 11:56 a.m. in Athens today. That’s after jumping 85 basis points yesterday, the biggest increase since July 2012, when the country was on the brink of exiting the euro area.

Stocks followed bonds, losing about 23 percent in the past month, the biggest drop of any major index tracked by Bloomberg. The benchmark ASE Index extended its decline today, dropping 1.8% to 873.33 at 12:17 p.m. in Athens after recording the largest slump in almost two years yesterday.

Two factors played a role in the selloff, according to Vangelis Karanikas, head of research at Athens-based Euroxx Securities SA.

One was “elevating political risks, especially due to presidential elections in March that could lead to national elections and a potential change of government,” he said in a phone interview. There are “also investor concerns on whether Greece can cover its financing needs from markets if it achieves an early bailout exit.”

International Monetary Fund Managing Director Christine Lagarde said Oct. 9 that the fund is ready to provide Greece with precautionary support in the case of an early exit.

Precautionary Program

In a speech before a confidence vote in parliament last week, Samaras said his government is negotiating a precautionary program that would see Greece seeking emergency loans from its euro-area partners or the IMF only as a last resort.

As the results loom of a European Central Bank-led bank check that may show more capital shortfalls for Greek lenders, Citigroup Inc. analysts suggested in an Oct. 4 note to investors that Greece may not be able to cover its financing needs without some form of loans from the so-called troika of the ECB, the IMF and the European Commission. Doubts about growth prospects in the euro area are adding to the jitters.

Shunning Risk

“The Greek selloff is not an isolated event as investors throughout the world shun risky assets,” Alexandros Maglaras, who helps oversee 300 million euros at Triton Asset Management in Athens, said by phone. “The situation in Greece is more serious, because investors woke up to the political risks, as presidential elections are getting closer.”

More than four years and as many prime ministers after Greece first requested outside help at the start of the euro-area crisis, the government is still prone to instability as it pushes through the budget cuts and economic overhauls demanded by the so-called troika of the ECB, the IMF and the European Commission.

It also faces the challenge of replacing the country’s president, Karolos Papoulias, whose term is nearing its end. Samaras needs a supermajority of lawmakers to elect a new head of state, and failure to do so would threaten early elections by March.

Polls indicate that the anti-bailout opposition Syriza party, which advocates a “significant” writedown on Greek public debt and the annulment of hundreds of reforms in the labor, products and service markets, has enough support to make it the largest party ahead of Samaras’s New Democracy if an election were held now.

Election Assurances

The confidence vote won by the government last week did little to calm investors’ doubts, nor did repeated reassurances by Samaras that elections won’t take place before 2016. Greece won’t deviate from the path of fiscal consolidation and won’t endanger political stability, the premier told a cabinet meeting yesterday.

“The government, after obtaining the confidence vote last week, needs another bold gesture,” Dimitris Sotiropoulos, an associate professor of political science at the University of Athens, said in a phone interview. “Without such a move, the government may be at a continuous impasse.”

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