SCENARIOS - Greece keeps market guessing on bond sale

By Alex Chambers

LONDON, Feb 26 (Reuters) - A three-way stand-off prevails
between Greece, the European Union and the debt market over
Greece's plan to issue a 10-year syndicated bond.

Athens, which has said its funding needs are met until
mid-March, has held off on offering the bond, apparently hoping
market jitters will ease, letting it borrow at lower yields. It
has urged the EU to help calm markets by making a stronger, more
concrete statement of support for Greece. [ID:nLDE61K05L]

But the EU wants to keep pressure on Greece to reform its
finances, and is keen to avoid setting a precedent by taking
responsibility for debts of weak southern states. At the same
time, it wants to avoid a market meltdown that could undermine
market confidence in the entire euro zone. [ID:nLDE61O20P]

In the absence of a bond sale, the market is worrying about
Greece's ability to fund itself; the 10-year Greek bond spread
to German Bunds rose as high as 370 basis points this week, near
January's peak of 405 bps. But while a chance of EU aid exists,
the market is reluctant to drive Greek yields much higher.

Based on conversations with government officials, bankers,
traders and analysts, here are four scenarios for how the
situation may develop in the next two weeks, with implications
for financial markets:

GREECE ISSUES BOND IN CURRENT MARKET CONDITIONS

SCENARIO: Bankers and analysts estimate that in current
market conditions, Greece would be able to sell the bond but at
a substantial new-issue premium; pricing might come in somewhere
between 375 and 400 basis points over Bunds. The market is
expecting an issue of 3 to 8 billion euros.

PROBABILITY: Significant -- bankers say much of the recent
widening of Greek bond spreads is due to the uncertainty over
its access to liquidity. Paying in the region of 7 percent for
10-year money would be very expensive for Greece, but could
benefit further fund-raising exercises in coming months.

However, the 10-year bond plan was announced in late January
by the then-director general of the Public Debt Management
Agency, Spyros Papanicolaou, who was appointed by the previous
conservative government; he was replaced last week by prominent
commercial banker Petros Christodoulou, who may be less willing
to accept market terms he considers exorbitant. [ID:nLDE61H2JZ]

MARKET IMPLICATIONS: Greek bonds GR10YT=RR and banking
stocks, as well as the euro EUR=, could rise in relief. But
the rally would probably be brief since more funding challenges
would loom; 8.2 billion euros of five-year government bonds
mature on April 20, 1.92 billion euros of 13-week Treasury bills
on April 23, and 8.5 billion euros of 10-year bonds on May 19.
Also, investors will remember the poor performance of the
secondary market after a Greek five-year bond sale in January.
[ID:nLDE61F1VJ]

GREECE ISSUES BOND AFTER STRONGER EU PLEDGE OF SUPPORT

SCENARIO: EU governments make a more concrete pledge of
support for Greece, indicating specific steps they might take to
prevent any default, though a lack of political consensus means
they remain unlikely to announce any final decision. A wide
range of steps could be considered, from having state-owned
financial institutions buy Greek debt to accelerating
disbursement of routine economic aid to Greece, giving Greece a
debt guarantee, or establishing a bailout fund. [ID:nLDE6190HW]

PROBABILITY: This may be the single most likely outcome. It
would likely be accompanied by a Greek pledge of fresh austerity
measures, which might be made to EU Monetary and Economic
Affairs Commissioner Olli Rehn when he visits Athens next week
to discuss this week's EU inspection of Greece. [ID:nLDE61O1ED]
Deutsche Bank (DBKGn.DE) CEO Josef Ackermann met Greek Prime
Minister George Papandreou and Finance Minister George
Papaconstantinou in Athens on Friday; this could help facilitate
an understanding between Greece and the EU. [ID:nLDE61P1JN]

Papandreou will visit Berlin on March 5 at the invitation of
Chancellor Angela Merkel; a deal between Greece and Germany on
aid might conceivably be sealed then. [ID:nLDE61P15A] Merkel
said this week the euro was for the first time in a difficult
position because of the Greek crisis, which may have been an
effort to prepare German public opinion, strongly against
helping Greece, for aid. [ID:nLDE61N2QF]

MARKET IMPLICATIONS: The 10-year Greek bond spread could
narrow back below 300 bps and Greek banking stocks would jump.
However, the euro might not rally and Bunds could actually
suffer moderately, as markets worried that a precedent had been
set for rich EU states to fund reckless spending by poor ones.

GREECE RESORTS TO OTHER FUNDING OPTIONS

SCENARIO: Judging a 10-year bond issue in the next two weeks
is too expensive, Greece chooses other options instead, perhaps
a large issue of T-bills, which would have shorter maturities
and thus be easier to sell. It might also arrange to sell some
bonds through a private placement.

PROBABILITY: Low. From the points of view of both Greece and
the market, this option would not resolve uncertainty but merely
prolong it; since it is unlikely that all of Greece's funding
needs this year can be met through T-bills and private
placements, the market would continue wondering whether Greece
could retain access to the long-term debt market.

MARKET IMPLICATIONS: The 10-year Greek bond spread could
stay at high levels above 300 bps.

GREECE REFRAINS FROM SELLING DEBT

SCENARIO: Greece does not issue debt in the next two weeks.

PROBABILITY: Very low. It is not clear that Greece would
actually start to run out of money at mid-March, but investors
might interpret a decision not to issue debt by then as a sign
that Greece was not confident it retained access to the market.

MARKET IMPLICATIONS: This could ignite a fresh round of
speculation against Greek and euro zone assets in general,
pushing the 10-year Greek bond spread to a fresh high above 405
bps.

(Additional reporting by George Matlock; Editing by Andrew
Torchia)