Greek yields fall as Germany denies plans for new debt haircuts

Mon Feb 3, 2014 11:55am EST

Related Topics

* Germany denies plan for new losses for Greek bondholders

* Greek yields fall, but still near 2014 highs

* Greek yield curve still inverted

By Marius Zaharia

LONDON, Feb 3 (Reuters) - Greek bond yields slipped on Monday on suggestions that Athens was poised to receive more international aid, with the fall accelerating after Germany denied private bondholders could suffer further losses.

Weekly Der Spiegel reported at the weekend that Berlin was making preparations preparing the ground for a third aid package for Greece of 10-20 billion euros. This could include a further haircut for public creditors or a "limited additional programme" involving fresh funds from the European rescue fund.

The German finance ministry on Monday denied "categorically" the possibility of another debt writedown after the restructuring undertaken in March 2012.

"Germany denied they want to exercise any debt forgiveness so this is why Greek bonds are rallying. It appears they favour throwing more money at Greece, which is a sensible thing to do," said Gianluca Ziglio, an analyst with Sunrise Brokers.

"It seems there's willingness from European governments not to put at risk everything that's been achieved so far."

Greek 10-year yields fell 23 basis points to 8.49 percent, further retreating from 2014 peaks of 8.90 percent hit last week as an emerging market sell-off spilled over to the euro zone's most battered debt market.

Ten-year yields were still about 35 bps below Greek 30-year yields. An inverted yield curve is usually a sign investors worry that they may not be repaid in full.

Analysts said such worries reflected the fact that talks between Greek authorities and international lenders about how to plug an 11 billion euro funding gap for this year and next are yet to begin.

Greece's ruling coalition, which has only a three-seat majority in parliament, could still make requests with which Germany and other European states may disagree.

Any failure to reach a compromise in a smooth fashion could lead to defections from the coalition and pave the way for early elections in Greece. The opposition party Syriza, which has pledged to tear up the bailout agreement, leads in polls.

"Syriza has an average lead of 3.5 percent in five polls in the last few days. That's pretty systemic," said Gabriel Sterne, chief economist at distressed debt brokerage Exotix.

The so-called systemic risks in Greece refer to events that may endanger the future of the euro zone.

Meanwhile, the Der Spiegel report prompted speculation that the euro zone's major economies may be willing to act to stave off potential political instability in the bloc's weakest members that may follow gains by eurosceptic parties in the May 22 elections to the European Parliament.

"If the core is willing to make overtures to the periphery in the run-up to those elections, that certainly would be of additional support with regards to the periphery spread narrowing trend," said Rabobank strategist Richard McGuire.

Other euro zone bond yields were flat to sightly lower as final reports on euro zone manufacturing activity largely confirmed the recovery trend.

German 10-year yields, the region's benchmark, fell 1 bps to 1.56 percent.

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