Greek Bond Yields Driven Higher on Restructuring Fears

Worries over haircuts infect other periphery nations

The yield on Greek bonds, particularly for short-term paper, skyrocketed Thursday as worries over the possibility of haircuts drove investors’ fears. Portuguese, Italian, and Spanish bonds followed, since anything that would initiate a Greek restructuring would likely affect the other troubled nations as well.

Reuters reported that the yield on 10-year Greek bonds hit a euro-lifetime high of 13.32%, approximately 990 basis points higher than the yield on benchmark Bunds. Shorter-term bonds were hit even harder, with 5-year yields rising more than 80 basis points to top 18% and 2-year yields gaining 90 basis points to hit 18.38%.

Driving some of the fever were remarks made Wednesday by Wolfgang Schaueble. The German finance minister told Die Welt that if European Central Bank (ECB) and European Commission (EC) analysis revealed Greece’s debt to be unsustainable, additional measures would be required. This sent fears through the markets of the possibility for restructuring and the potential for bondholders to be forced to accept losses. The analysis is to take place in June.

Moritz Kraemer, head of sovereign ratings at Standard & Poor's, said in Die Zeit that a debt maturity extension would not go far enough and that a haircut of 50-70% might be necessary.

Data monitor Markit put the cost of insuring against a Greek default through the use of credit default swaps at a record high of 1,105 basis points. Richard McGuire, a strategist at Rabobank, was quoted as saying, "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."

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

Fears of restructuring drove investors to seek the safe haven of German Bunds, driving their futures higher.

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