Greek bond yields slip back as IMF meets over bailout

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Greek government bonds are a relative sea of calm on Monday after last week’s “violent” moves, as officials in the International Monetary Fund prepare to discuss their participation in the country’s €86bn bailout later today.

After renewed market jitters over Athens’ bailout compliance, Greece’s 10-year bond yields have fallen back from two-month highs this afternoon to around 7.4 per cent.

The sell-off has eased as the IMF’s executive board will meet to discuss their involvement in Greece’s three-year rescue agreed in the summer of 2015. The Washington-based institution has yet to commit any fresh money to the bailout programme, and instead made stark new warnings about the country’s “explosive” debt dynamics in a leaked report last week.

This morning, Berlin’s finance ministry repeated Greece’s current programme would be “over” should the IMF decide to pull out.

The IMF has repeatedly clashed with its EU partners by pushing for a bold debt restructuring and less stringent budget targets for the government to hit after 2018.

The Fund holds a markedly more pessimistic view on Greece’s economic health than either the Syriza-led Greek government or creditors and is demanding reassurances in the form of more economic reforms if it is to sign off on more cash for its largest ever debtor economy.

“We have made it clear that we need to see that the program adds up before we can recommend it to our Executive Board for consideration”, William Murray, IMF spokesman said last month.

EU creditors have pencilled in a primary budget surplus of 3.5 per cent for Greece over the 10 years after the end of 2018, while the IMF is pushing for a target closer to 1.5 per cent.

“If Greece and its European partners decide on a higher primary surplus for a temporary period, we would need to evaluate the policies that could credibly support that target”, said Mr Murray.

Analysts at JPMorgan said they now “attach a higher probability to the government failing to find a parliamentary majority in support of the new measures or, alternatively, that it will simply deem paying the political cost of further austerity and supply-side reforms as unacceptable.”

Economists at Credit Suisse still expect events to reach a “quick” resolution later this month, rather than a repeat of the brinkmanship that led Greece to near default on its creditors in the summer of 2015 and 2016.

Should both the IMF and the EU resolve their differences and accept Athens’ austerity and reform plans, it should pave the way for a rubber-stamping of the country’s second bailout review later this month and “allow the European Central Bank to include Greek government bonds in its QE program” later this year, according to Anaïs Boussie at Credit Suisse.

The IMF will not be making any formal decision on its participation today but should inform eurozone ministers on their assessment of the bailout at a meeting of the eurogroup on February 20.

Should no breakthrough be reached, officials face a tight schedule to resolve their differences as France and the Netherlands head for elections in the coming months.

“There is some kind of political imperative, we believe, with the preference by all to close the negotiations ahead of at least the French elections, in order not to poison further the European political debate”, said Giovanni Zanni at the Swiss bank.

“As such, a decision might eventually be pushed through next month or in April, at the latest, if disagreements are not too extreme.”

First chart via Bloomberg
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