Greek debt hit by restructuring fears

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Greek borrowing costs reached a euro-era high compared with those of Germany. The euro tumbled on Thursday and premiums charged on Greek debt over Germany’s hit euro-era highs after the countries’ respective finance ministers talked of Greece needing more time to attract investors and raised the prospect of debt restructuring.

George Papaconstantinou told the Financial Times that Greece needed more time to convince international investors of its commitment to reform its finances.

Separately, Wolfgang Schäuble, Germany’s finance minister, told Die Welt newspaper that, if a study already under way showed that Greece’s debt levels were unsustainable, “further measures” would have to be taken.

When asked what those could be, he ruled out any involuntary restructuring before 2013, but warned that investors could face losses after that point.

The remarks were enough to reverse a recent rally in eurozone sovereign debt. “Greek bonds are getting crushed,” said Gary Jenkins, head of fixed income at Evolution Securities.

Jo Tomkins, strategist at 4Cast consultancy, said: “These comments didn’t say anything new, but they gave short sellers an excuse to get back into the market at better prices after the recent rally.”

Yields on Greek two-year bonds jumped 0.9 of a percentage point to 17.829 per cent.

The euro also slipped sharply, dropping 1½ cents against the dollar from an early session high to hit $1.4366 after a sustained run-up on expectations that the European Central Bank will raise interest rates further. However, it rallied to $1.448 late in the European day.

“The euro’s strength this year has been a waiting game on how long the markets can shrug off fears about eurozone default,” said Lena Komileva, global head of G10 strategy at Brown Brothers Harriman in London. She added that a Greek restructuring “will inevitably cause collateral damage to Europe’s banking system and contagion across Europe’s most vulnerable sovereign borrowers.”

Investors fled risky “peripheral” eurozone debt for the haven of Germany, where 10-year bond yields, which move inversely to prices, dropped nearly 4 basis points at one point before ending flat at 3.428 per cent. The flight to safety left yields on equivalent Greek debt 35bp higher at 13.27 per cent while Portuguese 10-year notes yielded 8.88 per cent, up 14bp.

“Everyone thinks restructuring is going to happen at some point. Peripheral tensions had eased in recent days, but they haven’t gone away.”The cost of insurance against a Greek default, via buying credit default swaps, also hit a new high at 1,139bp, implying it costs $1.14m a year to insure $10m of debt for five years.

Market participants are trying to factor in the scale of any likely losses on Greek debt.

Investors expect that any restructuring would start with Greece trying to extend repayment deadlines on existing debt, or asking investors to “forgive” interest on the loans.

But Mr Jenkins warned that it could take more than that. “Ultimately we believe that if the idea is to get the debt back to a sustainable level then the target will be the Maastricht treaty limit of debt-to-GDP of 60 per cent. In order to reach that level, bonds will have to take a haircut of some 62 per cent,” he said.

Looming elections this weekend in Finland added to the unease

Polls suggest Finns could elect an anti-European Union leader at the weekend. True Finns, headed by Timo Soini, has been only narrowly behind the centre-right National Coalition party and investors fear an anti-EU Finland could hamper Brussels’ negotiations for Portugal’s bail-out and further progress in creating permanent rescue mechanisms.

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