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“Greek bonds are getting crushed today due to the comments from the German finance minister and the Greek equivalent,” said Gary Jenkins, head of fixed income at Evolution Securities. “The European Stability Mechanism allows a roadmap towards restructuring, indeed it insists upon it if debt cannot be restored to a sustainable path.”
“These comments didn’t say anything new, but they gave short-sellers an excuse to get back into the market at better prices after the recent rally,” said Jo Tomkins, strategist at 4Cast consultancy. “Everyone thinks restructuring is going to happen at some point. Peripheral tensions had eased in recent days, but they haven’t gone away.”
Investors fled risky “peripheral” eurozone debt for the haven of Germany, where 10-year bond yields, which move inversely to prices, dropped nearly 4 basis points to 3.398 per cent. The flight left yields on equivalent Greek debt 24bp higher at 13.162 per cent while Portuguese 10-year notes yielded 8.88 per cent, up 14bp.
Mr Jenkins said investors expected that any restructuring would start with Greece trying to extend repayment deadlines on existing debt, or asking investors to “forgive” interest on the loans. But he warned it could take more than that.
“Ultimately we believe that if the idea is to get the debt back to a sustainable level then the target will be the Maastricht treaty limit of debt-to-GDP of 60 per cent. In order to reach that level bonds will have to take a haircut of some 62 per cent,” he said.