Greece battered on markets, denies u-turn on IMF

ATHENS Tue Apr 6, 2010 3:06pm EDT

Riot policemen walk in front of the Bank of Greece during a rally against austerity measures in Athens March 16, 2010. REUTERS/John Kolesidis

Riot policemen walk in front of the Bank of Greece during a rally against austerity measures in Athens March 16, 2010.

Credit: Reuters/John Kolesidis

ATHENS (Reuters) - Markets pushed Greece's risk premium to a euro lifetime high on Tuesday amid growing doubts over the country's capacity to resolve its debt crisis and fresh skepticism about a European Union-International Monetary Fund aid mechanism.

"The crisis is far from over," said Diego Iscaro, economist at IHS Global Insight. "The economy is still contracting, the structural reforms will still need to be implemented, the political situation is still uncertain."

Returning to markets after a four-day Easter break, investors battered Greece over reports that it was seeking to amend an EU-IMF safety net despite Greek officials denying they intended to renegotiate the deal.

Markets ditched Greek assets, pushing Greek borrowing costs to a record euro high, with the premium investors demand to hold 10-year Greek government bonds rather than euro zone benchmark German Bunds rising to as much as 409 basis points.

"There is a huge amount of uncertainty over the terms of the safety net," said Citigroup economist Giada Giani. "This scares markets because they think that IMF involvement may entail debt restructuring."

The euro lost ground against the dollar, and U.S. stocks opened lower on Greek worries, but later recovered.

"Markets are pushing to the limit to see where the threshold for the activation of the emergency plan is," said Giani.

"PANIC"

Finance Minister George Papaconstantinou said Greece could not borrow at current rates of about 7 percent for long but said it had no intention to use the EU-IMF aid mechanism for now.

"Today was a very bad day for Greek bonds," Papaconstantinou told Mega TV. "What happened today shows a panic by people with Greek government bonds in their portfolio."

He said the spread jump did not immediately impact the country's finances as its borrowing requirements for April were covered.

EU leaders agreed to the aid mechanism last month, saying Greece could be helped as a last resort through bilateral loans and money from the IMF if market financing becomes insufficient and if all euro zone states agree to it.

But the IMF still has not spelled out how it would cooperate, and every euro zone country, including Germany, has a veto right, making it difficult to trigger the aid mechanism. Under domestic pressure ahead of a key regional election in Germany in May, German Chancellor Angela Merkel has so far been reluctant to help Greece.

Greek and German officials have traded heated rhetoric over the past few weeks, with Berlin saying Athens must clean up its own mess and Greek politicians lashing out at Germany for lack of solidarity.

Faced with 23 billion euros of maturing debt in April and May, rising spreads make it more difficult for Greece to refinance and increase the chances the EU-IMF aid mechanism will have to be triggered.

Analysts said the deal had failed to convince many investors. "The general picture is that the aid plan is not as solid as it was first perceived by investors," said UBS strategist Justin Knight.

"There is a variety of questions asked by the market, including whether the IMF would request a restructuring of Greek debt and at what level spreads would trigger the activation of the aid mechanism."

REPORTS SPOOK MARKETS

Market News International quoted unidentified senior Greek government sources as saying Athens wanted to renegotiate the EU aid deal intended to protect Greece from potential default as it struggles to handle a 300 billion euro ($402.3 billion) debt in a crisis that has shaken the euro.

The report had said Athens wanted to bypass a potential contribution from the IMF because Greece was concerned the IMF would impose tough conditions.

But Papaconstantinou rejected the reports. "These alleged statements have nothing to do with reality," he told Mega TV.

Shares in the country's banks fell sharply, weighed in part by other developments.

The European Union executive Commission and European Central Bank had no comment on the report on Tuesday. The IMF said it will begin a staff technical mission to Greece on Wednesday to look at fiscal issues.

Greek Prime Minister George Papandreou had said over the weekend that the worst of the crisis was over, but analysts said the latest jump in borrowing costs would make it even harder for Greece to cope.

"With something close to 20 billion euros of debt needing to be refinanced by the end of May, the latest rise in yields is a major blow to hopes that Greece might yet manage to muddle through on its own," said Jonathan Loynes, at Capital Economics.

"Needless to say, none of this is good news for the euro either."

BORROWING NEEDS

The Financial Times reported on Tuesday Greece was seeking $5 billion to $10 billion from U.S. investors to help cover its May borrowing needs of about 10 billion euros to roll over maturing debt and meet interest payments.

The head of Greece's PDMA debt agency told Reuters last week Athens would issue a global U.S. dollar-denominated bond in late April or early May. He did not say how much it would seek to raise but said a roadshow would be organised after April 20.

Investor uncertainty also grew following a report in Britain's Daily Telegraph saying wealthy Greeks and companies were looking to move their funds outside the country.

It said big depositors had been clamoring to move cash to international banks such as HSBC (HSBA.L) or France's Societe Generale (SOGN.PA), which run large branches in Greece.

The report appeared to contradict recent data from the European Central Bank and comments to Reuters by analysts and Greek banking sources, who said there was no clear evidence of a major, extended deposit outflow from Greek banks.

The 10-year Greek/German government bond yield spread widened to as much as 409 basis points from 349 bps late on Thursday. The previous January euro life-time high was 405 basis points. Greek bank stocks .FTATBNK closed down 4 percent.

Five-year credit default swaps -- the price of insuring Greek debt -- rose to 400,000 euros to protect 10 million euros of government bonds, from 344,000 on April 5, according to Markit data.

(Additional reporting by Lefteris Papadimas and George Georgiopoulos in Athens, George Matlock in London, Lesley Wroughton in Washington and Kim Coghill & Jan Dahinten in Singapore; Writing by Ingrid Melander; Editing by Stephen Nisbet and Padraic Cassidy)

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Comments (7)
cranston wrote:
Other stories from the Telegraph today include : ‘Oriental Yeti Discovered’ and Micro pigs, polar bears, Miss Earth, and many great space pictures not to mention one for the boys, “Bruno Tonioli, the flamboyant Strictly Come Dancing judge, in charity strip.”

Apr 06, 2010 8:20am EDT  --  Report as abuse
GabinGrew wrote:
Greece is displaying all the symptoms of an addict. Insanely trying to justify it’s next fix. Caveat!

Apr 06, 2010 9:54am EDT  --  Report as abuse
Sally32 wrote:
It looks as though the situation in Greece is going from bad to worse. I remember reading on notayesmanseconomics web blog that he felt that the politicians involved in the Euro zone would dither and grandstand and that he feared for Greece. It looks like he is being proved right. Maybe someone will take a look at his policy prescriptions to help sort the situation out..

Apr 06, 2010 11:59am EDT  --  Report as abuse
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