Greek and Portuguese bonds led a slump in the securities of Europe’s most indebted nations amid mounting investor concern that they may be forced to restructure their debts.
The declines pushed the yields on Greek and Portuguese 10- year bonds to euro-era records after German Finance Minister Wolfgang Schaeuble said that Greece may need to renegotiate its debt burden if an audit in June questions its ability to pay creditors. Standard & Poor’s head of European sovereign ratings, Moritz Kraemer, said the risk of such an event has risen. Greek two-year yields climbed the most since January 27.
“Schaeuble’s comments bring the prospect of restructuring back onto the table,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It gives the market plenty of time to fret. If we have to wait until June, there’s the prospect of event risk in the future, which leaves the market open to speculation and spread widening.”
The yield on 10-year Greek debt jumped 29 basis points to 13.20 percent, as of 11:34 a.m. in London, the most since 1998 when Bloomberg began collecting the data. The two-year note yield surged as much as 103 basis points to 17.96 percent.
Portuguese 10-year yields added 14 basis points to 8.89 percent, the most since at least 1997, while two-year note yields were 28 basis points higher at 9.33 percent.
Schaeuble told Germany’s Die Welt newspaper that Greece may have to restructure because creditors can’t be forced to take losses until Europe’s permanent rescue system for the euro starts up in mid-2013.
“I’m not saying restructuring is inevitable, but the risk is more likely,” Kraemer said in an interview with Mark Barton on Bloomberg Television’s “On The Move”. “The base case is still that they would not restructure.”
Credit Default Swaps
Such an event could involve imposing losses of between 50 percent and 70 percent on investors, he said.
The cost of insuring Greek government debt rose 20 basis points to a record 1,080, according to CMA prices for credit- default swaps, signaling there’s a 60 percent chance the country will default within five years.
“That Greece may have no other alternative but to restructure in order to get itself back on the sustainable debt path is probably the worst kept secret,” said Greg Venizelos, a credit strategist at BNP Paribas SA in London.
Yields on 10-year Spanish debt jumped eight basis points to 5.31 percent, while the yield on Irish securities of a similar maturity rose 11 basis points to 9.20 percent.
Worst Performing Debt
Benchmark Italian debt also slipped after it sold 6.9 billion euros of bonds maturing in 2016 and 2023, pushing the 10-year yield up three basis points to 4.72 percent.
Portuguese debt is the worst performer this year among the euro-region nations, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. It has handed investors a 10.6 percent loss, while Greek bonds have lost 1.5 percent and German government bonds are 2.7 percent lower. Spanish debt has returned 2.8 percent and Irish securities 0.4 percent.
German bonds gained as investors sought the relative safety of debt issued by Europe’s largest economy, and before the nation’s government announces new economic forecasts. Germany sees economic growth slowing to 1.8 percent next year after a 2.6 percent expansion this year, Bild newspaper reported yesterday, citing the twice-yearly outlook.
The European Central Bank said in its monthly policy statement today that it will monitor upside inflation risks “very closely” after raising interest rates last week for the first time in almost three years.
The yield on the benchmark 10-year bond slipped four basis points to 3.40 percent, after reaching 3.38 percent, the lowest since April 5. The two-year note yield was also four basis points lower, at 1.83 percent.
by Lucy Meakin
SOURCE: Bloomberg
