Greek yields fall on report EU mulling extending loans

Wed Feb 5, 2014 11:56am EST

Related Topics

* Greek yields extend this week's falls

* Media report says EU weighing extending maturity of loans

* Germany sells 3.28 billion euro of five-year debt

* Expectations of further ECB easing supports demand

By Emelia Sithole-Matarise

LONDON, Feb 5 (Reuters) - Greek bond yields fell sharply on Wednesday after a media report said European Union officials were weighing extending the maturity of loans to Athens to 50 years.

Citing two officials with knowledge of the discussions, Bloomberg said the next bailout for Greece may include extending the maturity to 50 from 30 years, and cutting the interest rate on some previous aid.

An official close to Greece's debt negotiations with its international lenders had told Reuters as early as October that Greece may swap a big chunk of its bailout loans for a 50-year government bond as a way to achieve debt relief once it attains a primary budget surplus this year.

With a cut of Greece's nominal debt not an option, Greek and European Union officials have said some combination of at least three measures has been under examination to provide debt relief. These included lowering interest rates on existing loans, extending the maturities and pay-back schedule, and relief on financing EU structural funds.

Greek 10- and 30-year yields slid 30 basis points to 8.10 percent and 7.75 percent respectively, outpacing euro zone peers, including bonds issued by bailed-out Portugal.

Yields are down some 60 bps this week, almost reversing a rise to 2014 peaks on contagion from weak emerging markets.

Among other positive developments on Greece, Athens and its lenders had largely resolved differences over a potential fiscal gap this year, removing a hurdle to talks to release bailout funds, sources told Reuters on Tuesday.

"Today's news is positive in terms of the Bloomberg report that the EU are considering reducing interest rates on the loans and moving forward with the programme," said Gabriel Sterne, chief economist at distressed debt brokerage Exotix.

"There are a lot of overhanging uncertainties the resolution of which will be of considerable comfort to markets, especially in an environment where the opinion polls are not looking good for the government."

An extension of the bailout loans would provide a minor respite for Athens, some analysts said, but would do little to lower Greece's overall debt burden from the current 176 percent of gross domestic product without a debt write-down.

Thirty-year yields remain below those on 10-year paper, suggesting investors fear they may not be repaid in full.

"The news today provides short-term relief but it doesn't solve the medium-term issue which is that the debt to GDP ratio of Greece is not sustainable," said ING strategist Alessandro Giansanti. "It will be necessary to go for additional measures such as a cut in the face value of the debt."

RESILIENT BUNDS

German yields fell back to six-month lows after a five-year bond sale which was supported by bets the European Central Bank will signal easier monetary policy this week.

Concern over emerging markets and the ECB policy outlook is favouring German debt, seen as the euro zone's least risky, even though secondary market yields have been falling.

"Clearly the ECB is in play. A number of people think there will be a refi cut (on Thursday) and we are one of them," said RBS strategist Michael Michaelides, adding the consensus was for more easing "in the next couple of months".

Five-year German yields were 1 bps lower at 0.54 percent after the sale. The 10-year yield fell as much as 4 bps to 1.507 percent before rebounding to last trade at 1.54 percent after data showed activity in the U.S. services sector grew faster-than-expected in January.

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