EURO GOVT-Greece pummelled as aid confusion roils markets
Thu Jun 16, 2011 12:50pm EDT
* Greek bond prices plummet on doubt over rescue deal timing
*
Greece most expensive sovereign in world to insure -Markit
* Spain sale highlights contagion risk as demand slows
By
William James
LONDON, June 16 (Reuters) - Greek bond prices sank to record lows on Thursday as uncertainty escalated over how and when policymakers will seal a deal to meet Greece's immediate funding needs and set the country's finances on a sustainable path.
Greece's position looks increasingly unstable as the European Union and International Monetary Fund look for a fresh commitment to implement budget cuts, just as internal Greek political and public support looks stretched to breaking point.
"The disunity within the EU corridors of power, as well as the political and social upheaval in Greece, has shaken the markets," said CDS monitor Markit analyst Gavan Nolan.
The value of Greek 10-year bonds GR10YT=TWEB fell to its lowest since at least the launch of the euro at around 50 percent of their face value.
The cost of insuring against a Greek default spiralled by 174 basis points to 1,900 bps, making it the most expensive sovereign debt to insure in the world, according to data monitor Markit.
The turmoil sent the euro tumbling to a record low versus the safe-haven Swiss franc and intensified pressure on the region's other lower-rated states, highlighted by weakening demand at a Spanish bond auction.
"They had to concede quite a substantial amount to investors in order to get them to buy," said WestLB rate strategist Michael Leister.
"As we saw in Greece and the other countries, you can fund yourself and get liquidity but the crucial issue at some point in time becomes the price. Here it seems Spain is clearly heading in the wrong direction."
Cracks also started to appear in interbank lending markets as
euro zone banks were willing to pay a higher premium in the scramble to secure less-risky U.S. dollar funding.
The euro zone's safe haven, German Bunds, rose in the clamour for less-risky assets. The benchmark futures contract FGBLc1 closed at its highest level this year, up 47 ticks at 126.48.
The only sign of relief came from European Union Commissioner Olli Rehn, who said he expected an agreement from euro zone finance ministers meeting on Sunday to allow the latest batch of funding to released to Greece.
The comments brought little easing of pressure on Greek debt, as investors held out for an agreement on longer-term measures, but yields on Spanish bonds ES10Yt=TWEB fell back from the 11-year high they hit earlier in the day.
TIMELINE CONFUSION
Investors had been focused on next week's EU leaders' summit as the likely source of an agreement on how Greece could secure its financing over the medium term.
But officials hinted a deal could take longer to reach, heightening the uncertainty -- already at intense levels -- surrounding how to involve private bondholders in a restructuring of Greece's huge debt pile.
"It's more or less anybody's guess when the restructuring will come, but we believe it will come, and what kind of restructuring it will be is the big question," said Morten Povlsen, strategist at Nordea in Copenhagen.
Solutions ranging from an agreement to rollover existing debt holdings as they mature, to a more radical plan to swap existing bonds for one with longer maturities, remained possible policy responses.
So long as the confusion persisted, aversion to peripheral debt was likely to remain elevated, analysts said, but the possibility that a deal would come over the weekend could subdue selling on Friday.
"No one will want to have a short position going into the weekend with the chance that politicians could come up with a deal over the weekend," Povlsen said.
Reuters - 16/06/2011 17:47:33
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