Tags: EU | Greece | Financial | Crisis

Greek Borrowing Rates Soar on Market Fears

Tuesday, 06 April 2010 10:35 AM

Greece's borrowing costs shot up Tuesday following a report, later denied, that Athens was seeking to revise a deal hammered out last month which would provide a European and International Monetary Fund rescue to prevent a default.

Markets have so far appeared unconvinced that the bailout plan, which would provide Greece with bilateral loans from euro-zone countries and the IMF, would be sufficient to contain the country's debt crisis.

Finance Minister George Papaconstantinou vehemently denied a report that Athens was seeking to re-negotiate the rescue plan to avoid IMF participation.

"There was never any action by our country to change the terms of the recent agreement," Papaconstantinou said in a written statement late Tuesday afternoon.

"The agreement is important for both Europe and Greece, because it determines the conditions under which a country will be supported under specific terms by its partners," he said. "But as we have repeatedly said, Greece has not asked for this mechanism to be activated," adding later that Athens has no reason to seek the aid.

Greek borrowing costs shot up in the wake of the report, sending the interest rate gap, or spread, between Greek 10-year bonds and equivalent German issues surging to 406 basis points, or 4.06 percentage points, Tuesday afternoon from about 3.40 percentage points in the morning.

Shortly before Papaconstantinou's comments were issued, the spreads had narrowed to 3.84 percentage points after Finance Ministry and government officials denied the report, but on condition of anonymity in line with ministry policy. They contracted further to 3.76 points later in the evening after the minister's statement.

"Today was a very bad day for Greek bonds," Papaconstantinou said. "(But) Greece is not seeking to borrow today."

"The country has covered all its borrowing needs for April and now ... has more than a month before it is forced to borrow again," he told private Mega TV, adding that Greece would seek to raise more than 10 billion euros ($13.4 billion) in May.

"After that things will calm down because we will have no immediate borrowing needs," he said.

But Papaconstantinou added that Greece "cannot continue for long" paying high interest rates for its borrowing.

Athens has repeatedly said it hopes never to have to use the rescue plan, hammered out in Brussels on March 25, but that its existence would restore market confidence and reduce the cost of borrowing on international markets.

However, markets have remained jittery.

"Today's 60 basis points surge in Greek government bond yields underlines yet again the continued precariousness of the troubled economy's position," said Jonathan Loynes, chief European economist at Capital Economics.

Loynes said that although the spike in bond yields appeared to have been triggered by the reports that were later denied, "yields had been creeping higher again over the last week anyway, suggesting that markets were far from convinced that the package spelt an end to Greece's troubles."

On Wednesday, inspectors from the IMF are due in Athens to review progress in government austerity cuts. Greece has promised draconian fiscal reforms to reduce debt but remains under pressure from high borrowing costs.

The two delegations from the IMF are expected to stay for about two weeks and will meet this week with Papaconstantinou, Finance Ministry officials said. They will also review an overhaul of Greece's tax system.

It is the first inspection since the bailout agreement on financial assistance.

A lack of detail on the bailout plan, looming debt repayment deadlines, and modest demand for euro5 billion worth of seven-year bonds sold on March 29 have maintained market uncertainty.

Shares on the Athens Stock Exchange also suffered, with the general index closing down 2.21 percent at 2,048.69.

Greece must borrow euro54 billion ($72 billion) this year, but has so far raised less than half of that amount on the international markets. It needs to roll over some euro20 billion ($27 billion) in debt in April and May.

The center-left government has pledged to cut the budget deficit from 12.7 percent to 8.7 percent of annual output this year, and Papaconstantinou insisted that the target would be met without recourse to further austerity measures.

He told Mega TV that any upward revision to the 2009 deficit figure by the EU statistics branch would not involve "major changes."

The IMF is helping oversee tough inspections of Greek public finances, along with the European Commission and European Central Bank. The next assessment of Greece's progress is due in mid-May.

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Greece's borrowing costs shot up Tuesday following a report, later denied, that Athens was seeking to revise a deal hammered out last month which would provide a European and International Monetary Fund rescue to prevent a default. Markets have so far appeared unconvinced...
Tuesday, 06 April 2010 10:35 AM
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