Greek debt ends torrid week under pressure

Germany sharply outperformed Greece and other weaker economies on Friday as tensions in Europe’s debt markets suggested the eurozone crisis was far from over.

Greek bonds suffered one of their worst weeks since the country restructured its debt in 2012, as investors prepared for a possible default by Athens just five years after a debt crisis that almost tore the eurozone apart.

Fixed income investors took flight, moving money into haven assets including German and Swiss government debt in a rally that left benchmark 10 year German borrowing costs poised to fall below zero for the first time in history.

“We are getting uncomfortably close to not to have an agreement in place. We think a deal will be struck eventually, but it’s getting a bit close,” said Huw Worthington, an interest rate strategist at Barclays.

Yields on the country’s notes maturing in 2017 climbed 79 basis points to 26.81 per cent before falling back on Friday, capping a week of intensifying market pressure on policy makers in Athens as a deadline looms to unlock bailout funds.

The pressure on Greece rippled out through the eurozone’s periphery as investors considered what a Greek default might mean for countries such as Italy and Spain. Yields on Italian, Spanish and Portuguese 10-year bonds all climbed on Friday, while demand for debt issued by core Europe jumped, sending yields on Germany’s 10 year bonds as low as 0.05 per cent, a new record.

In Greece, prime minister Alexis Tsipras’ government has nearly €1bn due to the International Monetary Fund in May, along with pension and salary outlays to government employees. Without an agreement at a finance ministers’ meeting in Riga set for April 24, it may not be possible to unlock funds from an already agreed bailout package before the deadline to pay the fund.

Christine Lagarde confirmed on Thursday that the IMF could not accept an informal request from Yanis Varoufakis, the Greek finance minister, for more time for the country to make its next payment. Mr Varoufakis has denied that he made such a request.

The bond market, beset by very poor liquidity and thin trading volumes is signalling a strong risk that Greece could soon technically default on some of its obligations, with dramatic consequences for the eurozone and international fixed-income markets.

“The government’s budget situation and debt service schedule appear increasingly challenging,” said Reinhard Cluse, economist at UBS.

“Although time is running short, there are clear indications that the eurogroup meeting in Riga on 24 April might not bring a breakthrough. In the absence of a deal in the next few weeks, the government might not be able to avoid default, which — we fear — would likely raise the risk of Grexit.”

Since the week began, yields on the 2017 notes, the most sensitive area of the bond market in respect to debt negotiations — have soared more than 600 basis points and now trade at a heavily discounted price around 64, versus their face value of 100 when the debt was first sold.

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Economists with Pantheon Macroeconomics note that the tense negotiations have raised the prospect that a deal will not get done to “alarming levels”.

‘’We appreciate Germany’s desire to take a tough stance against Greece, but by almost excluding the chance of a deal next week, Greece could be forced into a corner,’’ said the economists. “This strategy is aimed at forcing Syriza to accept the conditions for reforms deemed appropriate by the EU. But it could backfire, by pushing Greece to a default on the IMF.’’