* Greek yields extend this week's falls
* Greek 2014 fiscal gap issue largely resolved-sources
* German yields steady near six-month lows as ECB eyed
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, Feb 4 Greek yields fell on Tuesday on
news that Athens and its foreign lenders had largely resolved
differences over a potential fiscal gap this year, removing a
hurdle to talks to release more bailout funds.
A review of progress under its EU/IMF bailout has dragged on
since September, largely due to wrangling over how Athens would
plug a gap in this year's budget. Surprisingly strong data on a
primary surplus for 2013 helped to resolve this issue, sources
on both sides of the negotiations told Reuters.
Greek 10-year yields fell 10 basis points to
8.37 percent on the report, outperforming euro zone peers,
albeit in thin liquidity. The yields have been retreating from
2014 peaks since Monday after Germany denied suggestions that
private bondholders could suffer further losses in a potential
new aid programme.
"Any developments that increase the chances of payments from
the existing bailout continuing and providing Greece with
further support while the restructuring of the economy takes
place is obviously a positive," said Ben May, European economist
at Capital Economics.
Greece has no pressing funding needs until May, when bond
payments of 9.3 billion euros are due. It has already been
bailed out twice with 240 billion euros from the EU and IMF
since 2010 and is expected to need additional funds and debt
relief before it can get on its feet again.
Although its 10-year yields have been falling sharply this
week, they still remain 35 bps above those of 30-year bonds,
reflecting investor concern they may not get repaid in full.
Elsewhere, German 10-year yields ended flat at
1.55 percent, having hit a six-month low of 1.534 percent on
talk the European Central Bank was seeking support to stop
sterilising its crisis-era bond purchases in money markets.
The ECB takes an amount equivalent to its holdings of euro
zone government bonds as weekly deposits from banks to offset
the buying and neutralise any threat it will fuel inflation.
The weekly operations are also aimed at quelling concerns
the bond purchases were directly financing governments,
something the ECB is not allowed to do.
A Bloomberg report, citing two euro-area central bank
officials familiar with the debate, said ECB President Mario
Draghi would only consider ending the sterilisation if he is
openly backed by the Bundesbank.
People familiar with the issue told Reuters that the ECB had
discussed the possibility of suspending the operation but this
was just one policy option and was unlikely to be decided at its
meeting on Thursday.
"If the ECB were to follow that path and go for a suspension
and not termination, it's a pragmatic way to add liquidity to
the system rather than introduce a new three-year LTRO
(Long-Term Refinancing Operation)," said Marius Daheim, a
strategist at Bayerische Landesbank.
"That may be a bit more difficult for the ECB to manoeuvre
in the current setting where banks are repaying LTROs. We don't
think there will be very strong demand for another LTRO."
The ECB successfully soaked up the 175.5 billion euro in
bond purchases it was aiming for on Tuesday, 24 billion euros
more than last week. It also allotted banks 20 billion euros
less in its weekly refinancing operation, further squeezing the
amount of excess cash in the system.
In recent weeks it failed to sterilise the entire amount
with traders saying banks preferred to hold on to the funds
rather than hand them back to the ECB. That was because excess
liquidity - the amount of cash banks have beyond
what they need for their day-by-day operations - hovered around
The drop in excess liquidity led to increased volatility in
overnight bank-to-bank borrowing rates in January as some banks,
less reliant on ECB funds, had to be more active in money
markets. If the ECB stopped sterilising, the excess liquidity in
the banking system would rise by almost 180 billion euros.
It would keep money market rates anchored at low levels,
preventing a tightening of market conditions that could hamper
the euro zone economic recovery, analysts said.