Losing 8 per cent on an investment in just over a week is a miserable experience. But that is what has happened to the buyers of €5bn of bonds sold by Greece on March 29.
On Wednesday, the prices on those bonds fell further, with traders quoting the seven-year bonds at 92 cents on the euro. The plunge in prices on Greek debt – and the concurrent surge in yields – shows no signs of abating.
Greece has struggled to contain speculation that it may default on its debts and it has so far failed to map a credible strategy to tackle its budget deficit. Uncertainty looms about the terms and viability of a European Union rescue plan, or one from the International Monetary Fund.
The renewed concerns about Greece have not, however, caused knock-on jitters on Portuguese or Spanish bonds. This is a marked departure from previous bouts of Greek default fears. The path of Portuguese and Spanish spreads is key – the contagion effects of the Greek crisis are high on people’s worry lists. A few days of steady spreads is not enough to quash contagion worries, but if this persists it will encourage risk appetite.
Other spreads are also worth watching. Greek officials are preparing to travel to the US
in an effort to borrow up to $10bn. With Greek yields vastly outstripping most emerging market dollar bond yields, the idea is that some emerging market and distressed debt investors will be tempted by Greek dollar bonds.
Were this the case, investors would be expected to start making room by lightening their holdings of Mexican or Brazilian dollar bonds. Spreads on these bonds would probably widen. So far, there has been no hint of this. Indeed, the spreads on Brazil and Mexico dollar debt have tightened this week. High yields will not be enough to persuade emerging market investors to buy Greek bonds, especially after the performance of its most recent euro deal.