Greek Bonds Rise for First Time in 5 Days on Hint of Compromise

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Merkel In Washington
Chancellor Angela Merkel said in Washington on Monday that the existing aid programs would be the basis for negotiations with Greece, and that she would wait to hear what its government has to say. Photographer: Andrew Harrer/Bloomberg

Greek government bonds advanced for the first time in five days on speculation the nation and its international creditors are moving toward an agreement that will help ensure Greece isn’t left short of funds.

The advance pared a slump on Monday that pushed three-year yields up by the most since 2012. Greek stocks rose for the first time in four days. Finance Minister Yanis Varoufakis is due to meet with his 18 euro-area counterparts on Wednesday to propose a short-term funding program meant to allow Greece to revise current bailout conditions and negotiate a new program.

Varoufakis told lawmakers in Athens on Monday that Greece will implement about 70 percent of reforms already included in the current bailout agreement and pursue more overhauls with the Organization for Economic Co-operation and Development.

“There is room for optimism given these proposals,” said Richard McGuire, head of European rates strategy at Rabobank International in London. “They indicate a willingness to compromise. We’re optimistic a resolution of some form will be forthcoming and possibly by the end of this month before the current bailout expires, which could see a marked retracement of the selloff we’ve seen since the elections.”

Greece’s three-year yield dropped 157 basis points, or 1.57 percentage points, to 19.51 percent at 4:51 p.m. London time. The rate climbed 308 basis points on Monday. The 3.375 percent note due July 2017 rose 2.185, or 21.85 euros per 1,000-euro ($1,131) face amount, to 70.905.

Austerity Measures

While the yield on Greek three-year notes retreated from highs set since the 2012 debt restructuring, it’s still up from 10.08 percent before Jan. 25 elections swept the Syriza party to power with a plan to renege on austerity measures required by the troika of the International Monetary Fund, European Central Bank and European Commission in return for financial aid.

Greece’s ASE Index of shares rose 8 percent on Tuesday, for the best performance among 18 western European markets tracked by Bloomberg. Eurobank Ergasias SA and Piraeus Bank SA gained more than 15 percent each.

Varoufakis also said in parliament that the government neither intends to tear up the existing bailout agreement, nor will allow the budget to be derailed.

German political leaders have said any extension of assistance to Greece must come with strings attached. Chancellor Angela Merkel said in Washington on Monday that the existing aid programs would be the basis for negotiations with Greece, and that she would wait to hear what its government has to say.

‘Liquidity Package’

“Even on the German side you can see the possible contours of a deal,” said Nick Kounis, head of macro and financial markets research at ABN Amro Bank NV in Amsterdam. “What’s very important is the Greek Finance Ministry saying they are willing to embark on a new program of reforms. You could see a liquidity package on the basis there is enough space and commitment to reform. That would give them a few months to reach a bigger and longer deal.”

To avoid a funding crunch when the current bailout program ends on Feb. 28, Varoufakis is set to present a proposal at the Eurogroup meeting in Brussels that will ask for an 8 billion-euro increase in the stock of Treasury Bills the country is allowed, said a government official who asked not to be named because the negotiations are confidential. He will also seek the disbursement of 1.9 billion euros of profits that euro-area central banks made on their Greek bonds holdings.

Italian Debt

Italian bonds declined, erasing earlier gains, as German Finance Minister Wolfgang Schaeuble said reports the European Commission will grant a six-month period for further discussions were “wrong.” He said told reporters in Istanbul that ministers won’t agree a new Greek program on Wednesday.

The securities rose earlier after Market News reported the European Commission will present the compromise proposal to the Eurogroup on Wednesday.

Italy’s 10-year yield rose two basis points to 1.68, percent while the rate on similar-maturity Spanish bonds climbed five basis points to 1.62 percent.

The European Commission also denied the report it will present a compromise proposal, saying “very intense contacts are ongoing between” Commission President Jean-Claude Juncker, Greek Prime Minister Alexis Tsipras and others, and that the plan being worked on is to keep Greece in the euro area. Expectations are “low” for a final pact this week, the commission said.

Greece’s securities are the worst-performing government debt this year, according to Bloomberg World Bond Indexes. They lost 7.9 percent through Monday. Germany’s, the euro area’s benchmark, earned 2.1 percent, the same as Italy’s, while Spain’s returned 0.9 percent.

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