Jittery Greek bond yields have slipped back from eight month highs this morning at the end of another big week for the state of the country’s stuttering bailout talks.
Yields on Greece’s two-year debt – which soared over 100 basis points yesterday – have have fallen around 16bps this morning amid a standoff between the country’s creditors in the EU and the International Monetary Fund.
Rating agency Moody’s has warned of host of credit risks emerging from the latest escalation in tensions, where Athens’ left-wing government could be asked to pass through further reform measures to satisfy the IMF’s demands.
That raises the threat of early elections amid dwindling support for prime minister Alexis Tsipras and a renewed bout of uncertainty for an economy that has barely returned to growth after six years of bailouts.
“Early elections might bring a new and more reform-minded conservative government, but Greece’s economy would be hit again by prolonged uncertainty”, said Kathrin Muehlbronner at the rating agency.
Greece faces a liquidity crunch as soon as July – slap bang in the middle of Europe’s electoral calendar – should the EU and IMF fail to bridge their differences over the bailout targets and debt relief terms attached to Greece’s €86bn bailout agreed in the summer of 2015.
Yields on Greece’s two-year bonds have surged far above that of 10 year debt (which stand around 7.5 per cent), reflecting investor anxiety about the country’s short-term cash flow problems.
Greece needs to pay €1.4bn to the European Central Bank in April and a more significant €7bn to creditors in July (see chart below). It is not expected to be able to make the latter payment without a tranche of fresh rescue cash.
Moody’s warns the country will be “highly challenged” to make the repayments but expects a compromise is in the offing in a repeat of events seen in 2015 when Greece was pushed to the brink of default and even missed an IMF repayment.
“We do not expect a default because it is not in European creditors’ interest”, said Ms Muehlbronner.
EU officials, led by Eurogroup president Jeroen Dijsselbloem, have been in intense talks to break the impasse between the hawkish German treasury and the Washington-based IMF which wants softer budget targets baked into the programme over the next decade.
Eurozone finance ministers will be meeting to discuss Greece on February 20 – the last major meeting before an electoral calendar that begins with the Dutch elections in March.
In the absence of a breakthrough by the spring, Ms Muehlbronner warns that the withdrawal of the IMF could mark the end of the terms of Greece’s current bailout and open up a new set of renegotiations after Germany’s elections in September.
Berlin has insisted the current rescue deal would end without the IMF, as the Fund’s financial participation had been a crucial element of passing the measures through its parliament.
“Such a scenario would be highly negative for Greece in our view, because the economy would likely be hit by another period of uncertainty and loss of confidence, making Greece’s fiscal targets more difficult to achieve”, added Ms Muehlbronner.
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