Eurozone government borrowing costs dropped sharply on Monday on hopes Greece had avoided ejection from Europe’s monetary union, with Portugal’s ten-year bond yields falling briefly below US equivalents.
Optimism that the crisis over Greece would not trigger a broader upset was underlined by Moody’s, the rating agency, which said its “central assumption” was that Greece would not exit the eurozone and would avoid a default.
However, Alastair Wilson, Moody’s head of sovereign ratings, told the Financial Times that if the agency’s assumptions were wrong, the impact on the rest of the bloc’s ratings could be “significant”.
Eurozone bond yields, which move inversely with prices, had tumbled at the start of the year as the European Central Bank moved closer to launching “quantitative easing”, or large scale purchases of government bonds. Lower yields have also reflected worries about weak eurozone growth and low inflation rates.
The rally was interrupted by the election at the end of January of a new Greek government led by the left-wing, anti-austerity Syriza party – with put Athens on a collision course with its international creditors. But the rally appeared to be back in full swing on Monday after Friday’s tentative agreement between the Greece and European finance ministers on a temporary extension of its bailout.
Greek bond yields saw the biggest falls. The yield on three-year Greek debt, which earlier this month exceeded 21 per cent, fell to 16.6 per cent — although that was still higher than before January’s elections. But declines were broad-based with yields on ten-year Spanish and Italian bonds each falling 8 basis points to 1.42 per cent and 1.49 per cent. Portugal’s ten-year bond yields fell at one point to less than 2.13 per cent – lower than the yield on a ten-year US Treasury — before rising slightly higher.
At the height of the eurozone debt crisis between 2010 and 2012, politicians blamed credit rating downgrades for exacerbating market turbulence. However confidence that eurozone leaders are now better prepared for a debt crisis has since helped stabilise ratings. That stability “reflects our assumption, our central expectation that Greece will not exit [the eurozone] and indeed that some sort of accommodation will be reached between Greece and its creditors which will avoid a default”, Mr Wilson said in a FT video interview.
Fall in yield on three-year Greek debt, which earlier this month exceeded 21%
But he hinted that Moody’s would quickly reconsider if the possibility of “Grexit” — or Greek exit — returned to haunt financial markets. “It is too soon to start talking about the re-emergence of Grexit risk,” he said. “I think it fair to say that if Greece were to exit the eurozone, that would demonstrate that an entity which was intended to be indivisible is in fact divisible . . . So it would be a significant effect — but it’s a long way off.”
His comments were noticeably more cautious than comments last week by Standard & Poor’s, a rival ratings agency. “We believe that the financial burden of a Grexit on the remaining 18 eurozone sovereigns would be moderate and absorbed over decades, and we therefore do not expect that a Grexit, by itself, would have significant rating implications for these sovereigns,” said Moritz Kraemer, S&P credit analyst.
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