Greek bond yields jump as debt relief put on hold

LONDON : Greek government borrowing costs rose to one-month highs on Wednesday after the euro zone’s bailout fund said it had put short-term debt relief measures for the country on hold.The European Stability Mechanism said it had suspended the measures designed to cut Greece’s public debt after the government proposed to make a one-off payout to pensioners in December.

Greek 10-year government bond yields rose 45 basis points to a one-month high of 7.30 percent, while five-year yields rose 40 bps to 8.19 percent, also a one-month high, according to Tradeweb data.

“The news has added to some pressure on Greek government bonds but I would see this as part of the ongoing negotiations between Greece and its creditors,” said DZ Bank bond strategist Christian Lenk. “At the end of the day, we will see short-term debt relief measures.”

Euro zone finance ministers agreed on Dec. 5 to grant Greece short-term debt relief that would reduce the amount of the country’s public debt by 20 percentage points of GDP by 2060.

But on Dec. 8, Greek Prime Minister Alexis Tsipras said, without consulting euro zone lenders, that his government would spend 617 million euros in one-off benefits for low-income pensioners before Christmas because Greece exceeded its 2016 primary surplus target.

The ESM and its predecessor, the European Financial Stability Facility, announced on Tuesday plans to increase borrowing in 2017 in order to shoulder the burden of Greek debt relief measures such as a bond exchange with Greek banks.

Greece has been locked in on-off battles with its creditors for years, and analysts said the suspension of measures on Wednesday was likely to be posturing in lengthy discussions.

“This is just a way for the ESM and the Troika to make sure the Greeks comply with everything they have to do,” Natixis strategist Cyril Regnat said.  “All-in-all it is not that big and I’m not worried about the fate of Greek government bonds. I still think they will be one of the best-performing bonds next year.”

Regnat said he expects Greek bonds to qualify next year for the European Central Bank’s asset-purchase scheme, which should drive yields lower and pave the way for Athens to return to the bond market.

All other euro zone bond yields fell on Wednesday before the results of a U.S. Federal Reserve meeting investors expect to deliver its first rate hike in 12 months and flag its stance for 2017. Whereas a hike in rates would normally push yields higher, on this occasion it is fully priced in and the market is focusing on any clues to the rate outlook from Fed Chair Janet Yellen.