Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

It was never going to last. Greek government bonds have given back about a sixth of their surprising gains late last year, having reacted badly to a leaked International Monetary Fund draft report describing the country's debt and financing needs as approaching "explosive" territory. Creditor woes look depressingly familiar, and there's probably a lot more bond pain to come.

Hello Again
Greek bond yields set to give back Q4 rally as hopes dim for inclusion in ECB's bond purchase plan
Source: Bloomberg


Greece's recent fixed-income popularity reflected signs that government budget proposals would meet with approval from the European Commission, European Central Bank and IMF, and at long last Greek officials and the troika would have the appearance of getting along. Some improving economic data also helped. These ignited hopes of Greece being accepted finally into the European Central Bank's Public Sector Purchasing Program, and sparked a run of gains that made the government's securities the best performer in Europe last year.

Greece was never eligible for the ECB's QE as its bonds are deeply non-investment-grade, and it's mired in its third bailout. The idea that it would soon shake off either of these conditions, let alone both, never made sense. Inflation at a four year high is just the latest scare, as it threatens to make farcical the whole pretense that its debt is remotely sustainable -- it has at least 7 billion euros ($7.4 billion) of bonds due to mature before August. 

Four Years of Not Much
Greek GDP has yet to show significant improvement, though at least it's stopped freefalling
Source: Bloomberg, National Statistical Service of Greece

While the country seeks a fresh round of funding, the IMF board will meet on Feb. 6 to discuss its debt-servicing capacity. A return to the bad old days of bickering between the Greek government and its main creditors beckons. Germany is diametrically opposed to any debt forgiveness, and the IMF draft report says this is unavoidable.

Those contradictions aside, the one thing they can agree on is that Greece honors its commitment to get to a 3.5 percent budget surplus to GDP by 2018. The IMF says Greece is some full 2 percentage points shy of hitting that target, so it must cut state pensions and the tax-free allowance on personal incomes to 5,000 euros. Both Prime Minister Alexis Tsipras and Finance Minister Euclid Tsakalotos have in the past week made comments this would be "unacceptable" and not a "single euro" more of austerity measures will be approved.

A European Commission spokeswoman said Monday there's no reason for  an "alarmist assessment" of Greece -- adopting an amazingly passive stance. The IMF view offers no such pretense. And bond investors, who cannot afford such a chilled view, will vote with their feet accordingly. Hopes for entry into the inner ECB club will have to be put on the backburner, and consequently Greek debt should return from whence it came.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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