GREEK SOVEREIGN debt yields rose amid continuing worries over the country’s debt crisis after it suffered a credit rating downgrade.

The Greek 10-year bond yield rose 10 basis points to 16.25 per cent on uncertainty over how Athens would restructure its debt. Moody’s late on Wednesday downgraded Greece’s debt three notches from B1 to Caa and said there was a 50 per cent chance of default.

Moody’s said the outlook on Greek debt is negative, meaning that the rating could be reduced further. The rating is seven steps below investment grade. “Greece is increasingly likely to fail to stabilise its debt ratios within the timeframe set by previously announced fiscal consolidation plans,” Moody’s said. The country is also unlikely to meet its previously announced budget targets for 2011, it said. The move by Moody’s follows a two-grade cut to B, five levels below investment grade, by Standard and Poor’s on May 9th, which said further reductions are possible as the risk of default rises. The same day, Moody’s placed Greece’s B1 ratings on review for a possible downgrade.

A steeper rise in yields, however, was avoided because of rising hopes that Athens would be offered more rescue loans and expectations that the government was preparing to announce plans to speed up privatisation.

The biggest concern among investors is how Athens will restructure or default on its debt, which is considered inevitable by most investors because of the country’s huge debt burden.

Greece’s debt is likely to mushroom to 157.7 per cent of gross domestic product in 2011, the European Commission has said. It currently stands at €262 billion, or close to 150 per cent of gross domestic product.

Greece was due to return to financial markets and sell about €30 billion of bonds next year.

“Whatever way you look at it, Greece will have to bite the bullet and default. A big, coerced default may be delayed until 2013, but it will happen and that is putting peripheral yields under some pressure,” said one investor.

However, European Central Bank officials have repeatedly voiced their opposition to restructuring Greece’s debt because they fear it could spark turmoil in the banking system.

Strategists have dismissed the latest proposals for restructuring – a so-called Vienna-style restructuring – as unworkable. This would involve banks rolling over their Greek debt to avoid a full-scale default.

Strategists say there is no incentive for banks to roll over and hold on to Greek bonds.

Shareholders are likely to protest because such a move could damage balance sheets and restricts banks’ ability to lend elsewhere.

Talks between Athens and inspectors from the European Commission, European Central Bank and International Monetary Fund are expected to conclude today.

Greece signed up to a €110 billion bailout in May last year and, as well as working to secure the latest portion of that, is discussing a second rescue deal that could total some €65 billion to tide it over through 2013.

Greek officials are hopeful the “troika” of institutions will now release a €12 billion loan tranche Athens needs to cover its immediate funding needs.

While confirmation of the latest aid tranche could come soon, haggling over the shape of a second bailout package is expected to continue, culminating in a summit of European Union leaders in Brussels on June 24th. – (Copyright The Financial Times Limited 2012/Bloomberg)