Greek bonds sell off sharply as EU-IMF rift deepens

Greek debt sold off sharply on Thursday amid fears the country’s bailout lenders will not be able to bridge their differences in time to lend Athens the €7 billion it needs to avoid bankruptcy.

The International Monetary Fund has refused to sign on to the aid programme unless European Union authorities grant further debt relief to Greece, but the rift deepened after the head of the euro zone’s €500 billion rescue fund dismissed the IMF’s demand.

Euro-zone finance ministry deputies were locked in meetings on Thursday night attempting to resolve the dispute. Although Athens’ debt bill does not come due until July, authorities fear they must achieve a breakthrough by mid-February to avoid the issue becoming politicised in the forthcoming Dutch and French national elections.

Bond yields jump

Yields on Greek bonds due in 2019 nearly hit 10 per cent, their highest levels in eight months and a one-day jump of 100 basis points, in the clearest sign to date investors are beginning to price in the chances the two sides will not quickly reach an agreement. The move put the bond on course for the biggest weekly sell-off in a year.

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Brussels and the IMF have reached similar cliff-edges over Greece in each of the last two years only to resolve their stand-off at the 11th hour by signing off on bailout aid without full IMF participation.

In 2015, however, Athens came within days of defaulting, and some officials worry in Europe’s current febrile political environment it will now be difficult for Berlin and The Hague to proceed without the IMF, which is viewed in the Dutch and German parliaments as more credible than EU authorities.

Wolfgang Schäuble, Germany’s powerful finance minister, has made clear that full IMF involvement is essential to sustain political support for the programme in Germany, suggesting without it the bailout in its current form is dead.

Germany will hold national elections in September, and recent polls have shown Mr Schäuble’s ruling Christian Democrats losing support to a resurgent centre-left.

‘Fork in the road’

“If all partners now take a step towards each other, we can conclude this review and finally turn the page on a difficult chapter,” said European Commission economics chief Pierre Moscovici. “We are at a fork in the road: we can choose to build on the progress made, or risk jeopardising it.”

Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of his euro-zone counterparts, was engaged in intense talks with international counterparts on Thursday night in a bid to resolve the impasse.

But tensions were heightened by Klaus Regling, the EU bailout fund chief, who wrote in the Financial Times that a "sober" look at Greece's debt situation showed there was no "cause for alarm". The comments appeared to be a direct rebuke to the IMF, which this week issued a report saying the debt levels would become "explosive" if the EU did not restructure what Athens owes.

“The [IMF] has so far not been able to integrate into its analysis of Greece fundamental factors that set a member of the euro zone apart from other countries in the world,” Mr Regling wrote.

People briefed on the IMF’s thinking said the fund disputes Mr Regling’s view, noting that being part of the euro zone did not help Athens in 2012 and 2015, when it nearly crashed out of the common currency.

Gerry Rice, the IMF spokesman, said fund officials “stand by” their debt analysis, though he conceded the conclusion was only supported by “most” board members – a reference to a rare public break between European and non-EU executive directors on the board.

– (Copyright The Financial Times Limited 2017)