* Greek yield rises spark concerns of prolonged sell-off
* Investors push back on capital gains tax plans
* Government fragility evident ahead of EU elections
(Adds quotes, updates prices)
By John Geddie
LONDON, May 16 Greek bond prices slipped on
Friday, deepening sharp falls on Thursday triggered by
nervousness about a tax on foreign holders of Greek bonds and
the stability of the Greek government.
The rally in Greece's sovereign bonds had been fairly steady
since the start of the year, but analysts fear a reversal which
started with some hedge funds selling bonds could prove to be
more than just a blip.
"If volatility regains momentum, then the risk assessment
for other investors may change," BNP Paribas strategist Patrick
The yield on Greek 10-year government bonds rose
13 basis points at 6.95 percent, following a jump of over half
a percentage point on Thursday.
Portuguese equivalents also rose 11 bps to 3.82
percent in sympathy with Greece, while traders said some
domestic buying helped stop the rot in Spain and Italy which
suffered during Thursday's sharp peripheral sell-off.
Italian 10-year bonds were up 3 bps on the day
at 3.12 percent, while Spain's were 2 bps higher at
3.03 percent. Irish equivalents were unchanged at
2.69 percent, with some predicting Moody's might upgrade the
country for the second time in six months later on Friday.
Pressure on Greek bonds has been widely attributed by
traders to a Greek government circular detailing capital gains
tax that would apply to non-resident holders of Greek debt
between 2012 and 2013.
Greece's government said the document had only sought to
clarify that the previous tax regime of 33 percent on foreign
legal entities and 20 percent on individuals had been abolished
in 2014, although it later withdrew the document.
One hedge fund manager, speaking on condition of anonymity,
told Reuters the move was a clear attempt to try to recoup some
of the profits that foreign hedge funds had made on Greek bonds
in recent years, but was convinced it wouldn't work.
"The whole thing is a non-starter," he said. "Say you are a
hedge fund based in the Cayman Islands that makes some money
buying Greek bonds, how is anyone in Greece going to know about
that? How will they know what the amount is like? And, how are
they going to get the money?"
Strategists said the Greek tax regime could have
implications for how governments, desperate to balance their
widening budget deficits, may look for future private sector
contributions. Italy was quick to deny that it had any plans for
a retroactive tax.
"The price action was very telling ... it just showed how
fast such a stampede can be generated to avoid any such
confiscatory actions," said KCG strategist Ioan Smith.
Others pointed out that double taxation agreements in Europe
would exempt many investors from such a tax, adding that the
shift in market sentiment was more likely a response to Greece's
fragile political situation ahead of European elections.
Expected gains for Greek eurosceptic parties in next week's
election might erode domestic support for the ruling coalition
and potentially trigger a general election.
Also having an impact on sentiment, EU economic growth came
in much lower than expected on Thursday, weighed down by
shrinking output in Italy and Portugal.
The slowdown is increasing pressure on the European Central
Bank to ease monetary policy further, with markets now broadly
expecting its June meeting to introduce a package of policies,
including cuts in all its interest rates and targeted measures
aimed at boosting lending to small- and mid-sized firms.