Greek two-year notes posted their first weekly advance since March after the European Union and the International Monetary Fund agreed to a 45 billion-euro ($61 billion) plan to help Greece avoid a default.
The two-year yield fell the most on record on April 12, a day after the accord was announced, before the notes pared gains on concern the aid will be delayed as national parliaments vote on the proposals. The securities recovered after Prime Minister George Papandreou moved closer to triggering the package by arranging a meeting with the European Commission, European Central Bank and IMF for April 19.
“Greece rallied on this news and will continue to do so with every positive step toward access to ongoing official support,” said Giles Gale, a fixed-income strategist at Royal Bank of Scotland Group Plc in London. “Every false step, the main risks lying in the European political process, will push yields higher.”
Two-year yields fell 27 basis points to 6.89 percent as of 5 p.m. in London yesterday, after rising 188 basis points the previous week. Greek 10-year yields rose for a third week, adding 26 basis points to 7.47 percent.
Greece’s budget deficit, at 12.9 percent of gross domestic product, is the largest in the EU. The country’s failure to convince investors it can narrow the gap helped send the yield premium for Greek 10-year bonds over similar-maturity German bunds, the region’s benchmark government securities, to 442 basis points on April 8, the most since the euro’s debut in 1999.
No Waiting
Declines for the country’s bonds indicated the nation may have to tap the international bailout to convince investors it can avoid a default. A senior finance ministry official in Athens said on April 11 that market reaction to the aid package over the next few days would determine future developments.
“I don’t think they would go as far as waiting to be seen as failing in the market,” Fitch Ratings Director Christopher Pryce said in an April 12 interview. “They would prefer to go to the EU. It could well be a week or two. I don’t think they could leave it much longer than that.”
Ireland will pass legislation on Greek aid within the next couple of months, Finance Minister Brian Lenihan said on April 12. France can gain approval in a week, Finance Minister Christine Lagarde said on April 13. Michael Offer, a spokesman for the German Finance Ministry told reporters in Berlin on April 14 the government would seek “legislative authority” on the loans should Greece call for aid. He didn’t say how long it might take.
German Objections
A group of German professors threatened to file a lawsuit with the country’s Constitutional Court aimed at blocking any EU loans, the Rheinische Post newspaper said April 14, citing Joachim Starbatty, one of the academics. The eight main economic institutes in Germany that advise the government said the IMF should take the lead in managing the Greek debt crisis rather than the EU.
German government bonds rose in the week, pushing the yield on the 10-year bund, down 9 basis points to 3.08 percent. The two-year yield fell 9 basis points to 0.88 percent, after declining yesterday to 0.87 percent, the lowest since at least 1990.
German bonds may decline next week as reports show that confidence in Europe’s largest economy increased. The ZEW Center for European Economic Research will say its index of investor and analyst expectations rose to 45.2 in April from 44.5 the previous month, according to a Bloomberg survey of economists, the first increase in seven months.
German government bonds returned 2.7 percent this year through April 15, compared with 1.3 percent for U.S. Treasuries and 0.6 percent for U.K. gilts, according to Bloomberg/EFFAS indexes. Greek government bonds have lost investors 5.4 percent.
Source: Bloomberg.
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