Greek bond yields drop below 8 percent after debt relief offer

11 May 2016
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Greece’s 10-year bond yields fell below 8 percent for the first time in over six months on Tuesday after euro zone finance ministers offered debt relief to the country from 2018.

In what appears to be a compromise between Germany, which does not believe Greece needs additional debt relief, and the International Monetary Fund, which insists it is necessary, the offer is conditional on Athens delivering on all reforms agreed under its latest bailout.

The details will be fleshed out by deputy finance ministers by May 24.

In a statement by the Eurogroup after a meeting on Monday, ministers said they also expect a deal within days on Greek contingency reforms — actions that would only kick in if Athens veered off its promised fiscal path — paving the way for the disbursement of new loans to Greece.

“At the very least it appears the gap between the IMF and the Germans appears to be narrowing and that has been very well received by investors,” Nick Stamenkovic, bond strategist at RIA Capital Markets said.

Greek 10-year yields dropped more than 60 basis points on Tuesday to 7.88 percent, levels not seen in six months, pulling other peripheral euro zone yields down in their wake.

Portuguese and Spanish yields fell 4 bps to 3.29 percent and 1.57 percent, respectively, while Italy’s were 6 bps lower at 1.42 percent. Benchmark German yields edged up slightly to 0.14 percent , away from 2016 lows of 0.075 percent.

Greek two-year yields fell more than 150 basis points to a two-month low of 7.97 percent.

A document prepared by the European Stability Mechanism, and seen by Reuters on Monday, shows there are serious concerns about the long-term sustainability of Greek debt.

In the main scenario outlined by the document, the euro zone would need to extend maturities of Greek debt and cap annual interest payments. Other possible measures include the euro zone’s bailout fund buying out Greece’s expensive loans from the IMF, or returning profits generated by the European Central Bank on its Greek bond holdings to Athens.

Based on the ESM document, euro zone deputy finance ministers will work on various debt relief steps for Greece over the next two weeks and present their findings to euro zone finance ministers on May 24.

But some strategists are unconvinced that a deal can be easily reached, and there remains a niggling concern that talks could push into the summer when Greece has a number of large debt repayments.

“There continues to be disagreement, in the creditors’ camp in particular, about the way forward,” DZ Bank strategist Hendrik Lodde said. “Because of the diverging opinions…talks are presumably going to drag on even further.”

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