GREECE’S BORROWING costs soared to their highest in more than a decade yesterday amid fears its debt crisis would worsen, raising pressure on Athens to agree a financial rescue deal.
As officials from the European Union and International Monetary Fund (IMF) met in Athens for talks with the government that are expected to last two weeks, nervous investors unloaded Greek bonds.
The sell-off pushed the interest rate on 10-year government debt to more than 8 per cent, the highest rate since the country joined the euro.
The concern in financial markets over Greece knocked prices of other euro zone government bonds, with the yield on 10-year Portuguese debt touching a new high of 4.82 per cent.
The IMF warned the situation in Greece posed a threat to global recovery even as it upgraded its expectations for global growth this year to 4.2 per cent.
"In the near term, the main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown and contagious sovereign debt crisis," the IMF said in its World Economic Outlook.
The renewed volatility in the bond markets has increased pressure on Greek prime minister George Papandreou to activate a proposed euro zone rescue earlier than planned.
There was speculation within his socialist Pasok party that he would soon do so. A senior party official said, however, that there was still “tension inside the [governing] party over the involvement of the IMF that needs to be addressed”.
Since April 12th, after euro-zone ministers committed to provide up to €30 billion in loans to Greece should they be needed, the yield on its benchmark 10-year bonds has surged from 6.672 per cent to yesterday’s high of 8.3 per cent.
Investors are focusing on the possibility that Greece will be unable to pay its debts and will have to negotiate a restructuring.
Credit default swaps (CDS), a form of insurance against the risk of a country failing to make interest payments on sovereign debt, suggest that confidence in Athens meeting those payments has been falling. Spreads on Greek five-year CDS reached an all-time high of 495 basis points, though they later retreated.
“It doesn’t look good,” said Elisabeth Asfeth, fixed income analyst at Evolution Securities. “The market is not interested in financing Greece. It is more and more concerned with whether Greece is going to go through a debt restructuring.”
Greek finance ministry officials said a formal request for €30 billion of bilateral loans from euro-zone partners, plus another €10 billion to €15 billion from the fund, could be made in mid-May, after all the terms were agreed. – (Copyright The Financial Times Limited 2010)
