Keep Watching Greece Because What's Going on There is Coming to America

Greece Faces New Debt Crisis Amid Fears of Default

Cost of insuring Greece's borrowing for five years hits new high as country's bonds are 'crushed'

April 14, 2011

Guardian - The cost of insuring Greek debt has hit a record high amid renewed fears that the country will default on its borrowings.

Data released by Markit showed that the cost of insuring Greek debt for five years, using a credit default swap, had risen above 1100 basis points for the first time. This means it would cost €1.1m (£970,000) to insure €10m of Greek debt, compared with £55,000 to insure £10m of UK debt.

The yield, or effective interest rate, on its Greek bonds also rose sharply after the German finance minister, Wolfgang Schäuble, suggested "further measures" might be needed to bring Greece's finances under control.

Schäuble told German newspaper Die Welt that investors holding Greek bonds could face losses after 2013, when the current Greek rescue package expires. His comments came after George Papaconstantinou, the Greek finance minister, admitted that the country might need "more time" to persuade financial markets that its recovery plan is credible.

City analysts warned that it appears increasingly likely that Athens will be forced into a debt restructuring. Gary Jenkins, head of fixed income research at Evolution Securities, believes institutional investors will eventually be forced to swallow substantial losses.

"Greek bonds are getting crushed today due to the comments from the German finance minister and the Greek equivalent," he said. "We believe that if the idea is to get the debt back to a sustainable level then the target will be the Maastricht treaty limit of debt to GDP ratio of 60%. In order to reach that level, bonds will have to take a haircut of some 62%."

The difference in the yields on Greek 10-year government bonds and their German equivalent also jumped to more than 1000 basis points for the first time since May 2010, when Greece was forced to seek a bailout.

"Greece's spreads are in now in uncharted territory," warned Gavan Nolan, director of credit research at Markit.

Greece is fully funded this year through the bailout agreed with the European commission and the International Monetary Fund. However, it had been expected to attempt to raise between €25bn and €30bn from the financial markets in 2012. Papaconstantinou told the Financial Times that this goal may need to be adjusted.

"Yes, we need more time. There is no question about that ... But more time, not in terms of a new programme but to convince," he said.

Although Papaconstantinou repeatedly insists that Greece would not default, traders believe his comments added to concerns that the eurozone crisis might be poised to enter new territory.

On Wednesday the IMF warned that the sovereign debt problems affecting Europe pose a risk to economic recovery and the stability of the world's financial sector.