EURO GOVT-Greek yields soar as restructuring worries grow

Thu Apr 14, 2011 6:49am EDT

Related Topics

* Greek yields soar as restructuring worries hits sentiment

* Other lower-rated debt suffers, safe-haven Bunds rally

* Cost of insuring against Greek default hits record high

By William James

LONDON, April 14 (Reuters) - Greek bond yields soared on Thursday, with short-dated paper coming under the most intense pressure, as markets priced in a greater probability that Greece would be forced to restructure its massive public debt.

The yield on two-year Greek bonds GR2YT=TWEB hit 18.38 percent, up around 90 basis points on the day while five-year yields GR5YT=TWEB hit a euro lifetime high of more than 18 percent, up by more than 80 bps.

The cost of insuring against a Greek sovereign default rose to a record high.

"All this talk of restructuring on Greece is really hitting sentiment now, the ECB seem to have disappeared from the market and the whole periphery is getting hit," a trader said.

The 10-year Greek yield GR10YT=TWEB rose to a euro lifetime high of 13.32 percent, widening the spread against benchmark Bunds to around 990 basis points.

The euro EUR= slipped broadly, hitting a session low versus the dollar. [ID:nWEA4594] While the bond market had already priced in a high risk of restructuring in debt-laden Greece, comments from the German finance minister on Wednesday have triggered fresh concern that holders of Greek debt could face losses.

In an interview with Die Welt newspaper, Wolfgang Schaeuble said "additional steps" would have to be taken to deal with Greece's huge debt burden if an analysis from the European Central Bank and European Commission in June showed it to be unsustainable.[ID:nLDE73D05J]

"Much of the restructuring is already priced in but I suppose it is now the uncertainty principle which is continuing to push risk premia higher," said Richard McGuire, strategist at Rabobank.

The cost of insuring against a Greek default through credit default swaps hit a record high at 1,105 bps according to data monitor Markit.

The pressure spilled over into other lower-rated euro zone bonds, with Portuguese, Spanish and Italian debt all sharply underperforming Bunds. The Portuguese yield spread hit 578 basis points, 24 bps wider on the day.

"What the market is extrapolating is that if indeed we were to see a debt restructuring with a haircut of 50 percent, like it was suggested by the S&P guys, this would obviously have an effect on Spain and Italy," said WestLB strategist Michael Leister.

Moritz Kraemer, head of sovereign ratings at Standard & Poor's, told Die Zeit a "haircut" of an even larger 50-70 percent might be necessary and that a debt maturity extension would not provide sufficient debt relief. [ID:nLDE73C26F]

"The banks there are vulnerable to any haircut on Greek debt given that they still have a lot of Greek stuff on their books."

The deterioration in the periphery pushed investors into safe-haven German debt, sending the price of Bund futures to a high of 121.07, 60 ticks higher on the day.

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