Investors shelve hopes of February breakthrough for Greece

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Greek bonds are standing on the sidelines of a wider rally in eurozone sovereign debt this afternoon as investors seemed to have all but abandoned hope of a major breakthrough between Athens and its creditors at a meeting of the Eurogroup next week.

Despite being billed as a crunch date for Greece to complete its second bailout review and secure the release of its next round of bailout cash, senior EU officials have dampened expectations of a “comprehensive” agreement amid a recent flare up in tensions between Brussels and the International Monetary Fund.

On a visit to Athens yesterday, Pierre Moscovici, the EU’s economics chief, said more work needed to be done to bridge gaps on the budget targets, debt relief measures and economic reforms baked into Greece’s €86bn bailout programme.

Having endured a tumultuous month, a Greek two-year bond seems to have settled around 9.6 per cent this week – a rise of 140 points in February.

The bond – which has become a barometer for investor sentiment about Greece’s bailout progress – hit an eight month high of near 10 per cent last week after a public spat between the EU, led by Germany, and the IMF erupted.

Greece’s 10-year yield hit near 8 per cent last week and has now fallen back to around 7.78 per cent.

Next Monday’s Eurogroup discussion between finance ministers and the IMF in Brussels is the last major meeting before a packed electoral calendar kicks off in Europe, beginning with Dutch elections in early March and ending with Germany in September.

Still, officials are sounding optimistic that they will be able to make some headway on Monday, laying the groundwork for an agreement to be reached at subsequent Eurogroups in late March or April. Progress at Monday’s meeting should also allow Greece’s bailout monitors to return to Athens next week.

Greece faces no hard deadline for an agreement until July – when it needs to pay a €7bn bill to its creditors – obligations it can’t make without another dose of creditor funds.

Ryan Djajasaputra at Investec expects “a compromise will be reached at some point, possibly just before the Dutch elections”.

Conditions for a compromise include Greece legislating for around €4bn in extra tax and reform measures and a clarification for the IMF of the medium term debt measures that EU creditors will afford the country after the bailout ends in 2018.

Mr Djajasaputra notes that February’s bond sell-off could threaten Athens’ hopes it can return to the international bond markets when its current bailout ends in August 2018.

Greece has been frozen out of the international bond markets since 2010, having endured seven years of bailouts. Surging debt servicing costs will also raise concerns the country will need an additional bailout after 2018 – it’s fourth since 2010.

Mr Djajasaputra adds:

Even if Greece is able to readily access capital markets, it will be at significantly higher interest rates than under its bailout agreements. That is one reason the IMF expects debt to rise rapidly without restructuring.

Certainly the prospect of a fourth programme is not zero, suggesting Greek uncertainty will probably exist for a while longer.

Hopes that the economy was finally back on track took a blow this week after GDP figures revealed Greece contracted by a surprise 0.4 per cent in the final quarter of the year – putting an end to six months of expansion.

Syriza and the EU have argued that economic conditions were on the up as the Syriza-led government has ramped up its tax collection efforts and stabilised the country’s public finances.

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