Greek bonds are at markets’ mercy

Greek bonds suffered another day of pressure on Monday, increasing their yields further, in contrast with the majority of other European countries, whose paper has remained virtually unchanged since Friday.

Greece’s new seven-year bond was marketed to investors at a yield of 3.5 percent last Thursday. It climbed to 3.66 percent on Friday and reached 3.99 percent on Monday. The return of the benchmark 10-year note advanced from 3.69 percent last Monday to 4.29 percent this Monday, while Cyprus’s equivalent was almost unchanged, at 1.9 percent from 1.87 percent, as was Ireland’s, from 1.13 percent to 1.14 percent. The yield on Portugal’s 10-year debt rose by just eight basis points, from 1.96 percent to 2.04 percent in the same period.

“We are the weakest link,” a local bond market source commented, acknowledging that the pressure on Greek paper is much greater than that of other European states, with Greek debt being the first to suffer from any market unrest and the last to be hedged from any consequences.

Another bond market source said it was likely that the Novartis affair may have also weighed on Greek bonds, bringing back fears of political instability.

In any case, this excessive reaction reveals the uncertain conditions in which the Greek state is returning to the money market. In spite of the rally observed in the last three months, Greek paper remains far from acquiring the confidence level that the bonds of countries which have emerged from the bailout process currently enjoy. This highlights the need for a safety clause once the bailout program ends.

In this context, Bank of Greece Governor Yannis Stournaras on Monday stressed the need for a precautionary line of financial support, in contrast to the position of the government, which fears any further commitments. Stournaras noted that such a credit line would allow the European Central Bank to continue accepting Greek bonds as collateral for cheap liquidity to Greek lenders.

Addressing the Greek-Spanish Chamber of Commerce, Stournaras reiterated that the fiscal policy mix has to change, with a shift away from excessive taxation and the slashing of productive expenditure.