By Josie Cox
Greek government bonds plunged Thursday, shaken by swelling
fears that the beleaguered country will be forced into a
default.
Yields on the country's two-year bonds soared by more than 4 1/2
percentage points on the day to above 27%--their highest since
being issued and a massive jump even for notoriously volatile Greek
debt. Yields rise when prices fall.
On the country's 10-year debt, meanwhile, yields advanced more
than one percentage point to a shade over 13%--their highest in
more than two years.
An inverted yield curve, where shorter-term debt yields more
than longer-dated bonds, is a classic signal that investors see a
very high risk of default.
"Overall the probability of a Greek exit [from the euro] remains
higher now than it ever was," economists at Barclays wrote in a
note. Others warned that a default or an exit from the euro could
spark a wave of volatility across other Southern European
countries, such as Spain, Italy and Portugal, that were hit hardest
during the height of the eurozone crisis.
Late Wednesday, Standard & Poor's Ratings Services slashed
its credit ratings on Greece to triple-C-plus, saying it expects
the country's debt and financial commitments to be unsustainable
without deep economic reform.
"The outlook for full-year economic growth is highly uncertain,"
S&P wrote, adding that it doesn't expect the stalemate between
Greece and its official lenders to be resolved before the middle of
May.
Greece is due to repay the International Monetary Fund more than
EUR750 million ($801 million) on May 12--part of the terms of its
first bailout program in 2010.
"If I were an investor, I think I'd even be tempted to ditch
some Portuguese and Spanish bonds in this risk environment," said
Neil Mellor, a strategist at Bank of New York Mellon. "It could be
a case of the market not understanding how bad the situation is
until it is too late," he added.
J.P. Morgan economist Malcom Barr said that his base case
remains that Greece and its creditors will come to an agreement
that prevents a default but a deal would only be struck "at the
11th hour, when the country is staring a default in the face."
Thursday's situation marks a sharp turnaround from a year ago,
when Greece sold more than $4 billion worth of bonds for which
investors put in orders worth around $28 billion, according to
bankers.
Strategists at the time said that the transaction--the first of
its kind for the country since April 2010--had paved the way for
Greece's return to funding markets faster than expected.
On Thursday, though, the bonds were yielding just over 19%
according to Tradeweb, having priced almost exactly 12 months ago
at 4.95%.
Among the buyers of the bond at the time, which matures in 2019,
were Atlanta-based asset-management firm Invesco, as well as Legal
& General Investment Management and BlackRock Inc.
Legal & General declined to comment on whether it still hold
those bonds and BlackRock wasn't available for comment.
Invesco sold "most" of the bonds that it had bought in April
last year in September, on account of "political risks," said
Nicholas Wall, a London-based portfolio manager at Invesco, which
has around $798.3 billion under management.
He said that Invesco now only has very marginal exposure to
Greece, though declined to give a specific number, and would
consider becoming more bullish--or optimistic--on the country only
if there is a change in composition of the government.
"Of course there is a price for everything, but in this case
it's very hard to determine where that might be for Greek bonds and
what risk premium I would need to see before thinking about
buying," said David Vickers, a multiasset portfolio manager at
Russell Investments, which has around $272.8 billion in assets
under management.
He added that the situation lacks clarity and precedent and that
despite the fall in prices, he isn't yet considering buying.
Russell Investments currently has no direct exposure to any Greek
assets.
Earlier this week, Valdis Dombrovskis, vice president of the
European Commission in charge of euro and social dialogue, bemoaned
the lack of progress in talks. "It is important for the Greek side
to step up its efforts," he said.
Greece's Syriza-led government has been locked in negotiations
with its international creditors since coming to power in late
January. It needs a deal by this summer to secure billions of euros
in bailout aid to avoid defaulting on its debts and potentially
exiting the euro.
Greece's main stock index flitted between slim gains and small
losses on Thursday, following a sharp selloff on Wednesday.
So far this year, the Athex index has declined more than 10%.
Over the past 12 months losses have surpassed 39%, making it one of
the world's worst-performing equity indexes.
Data late last month showed that Greek bank deposits plunged to
an almost 10-year low in February, as investors yanked out some
EUR8 billion.
"Greek banks [could soon] require more serious policies, like
capital controls," said Paul Donovan, an economist at UBS.
Jitters over Greece have also helped to fuel a hunt for safe
assets in Europe helping to propel German government bonds to
record highs.
Write to Josie Cox at josie.cox@wsj.com
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