Greece Unlikely To Tap Bond Market This Year - Sources
By Costas Paris
Of DOW JONES NEWSWIRES
ATHENS (Dow Jones)--Facing prohibitively high borrowing costs, Greece is highly unlikely to tap the bond market this year, two senior government officials said Thursday, unless the European Union takes convincing steps to stem the debt crisis engulfing the euro zone.
Since May, when Greece appealed to the European Union and International Monetary Fund for a EUR110 billion bailout, investor worries about the country's ability to service its debt--combined with fresh fears about other struggling euro-zone countries--have kept interest rates on Greek government bonds persistently high.
Earlier this month, the spread between 10-year Greek government bonds and their benchmark German counterparts--a measure of credit risk--reached a record high, with the yield on the 10-year Greek bond rising to 12.55%, compared with 2.82% for the 10-year bund.
Since then, the spread has come down sharply--to around 815 basis points Thursday--but remains far above the level at which Greece would be able to afford.
"It doesn't look good for long-term issuance in 2011," one of the officials told Dow Jones Newswires. "Anything convincingly above 400 basis points over the 10-year German bunds or an interest rate of about 6% is unsustainable. So we have got a long way to go."
Thanks to last year's bailout, Greece is fully funded through early 2012, but the government had hoped to test the market this year as it gradually weans itself off the EU and IMF financing as foreseen under its loan deal.
As part of those efforts, Greece resumed issuing short-term three-month and six-month treasury bills in September and hopes to build a cash buffer through a series of monthly auctions this year. However, the real test of investor confidence will come when the country issues longer-dated bonds of more than one year's duration.
"Unless the EU decides on a permanent and convincing support mechanism for countries in the periphery of Europe, spreads will remain high, not only in Greece, but also for other European countries with high debt problems regardless of their efforts, at least in the short term," a second official said.
Earlier this week, Finance Minister George Papaconstantinou blamed the ongoing turbulence in European bond markets for Greece's still-high spreads, saying they reflected broader unease about the euro zone as a whole rather than just Greece.
Speaking in an interview, he said that "a major decision that will once and for all settle the issue of the sustainability of debt in the euro zone" would be reached by European leaders in the next two months.
Among the issues being discussed to tackle Europe's debt crisis includes a substantial increase in the size of the EU bailout mechanism, the European Financial Stability Facility, beyond its current EUR750 billion funding.
Although that has helped allay investor concerns--leading to a recent narrowing in European peripheral bond spreads--the fear of a Greek government default, or debt restructuring, lingers.
Rating agency Standard & Poor's Thursday said there is a 40% probability that Greece may have to restructure its debt.
"Apart from Greece, all other euro-zone countries have an investment-grade rating, which means the risk of default isn't very high," said Carol Sirou, head of S&P France, at a conference for French financial journalists in Paris. "There is a 40% risk that Greece might have to restructure its debt."
S&P has already downgraded Greece's debt into speculative territory with BB+ rating and warned that it may downgrade that rating further.
