Mixed reaction to rescue from analysts and investors

BOND MARKET:GREECE'S DEBT markets rallied in response to the rescue announcement before paring gains amid a mixed reaction from analysts and investors.

Weeks of uncertainty about Greece’s ability to tackle its deficit had on Thursday driven up its borrowing costs to the highest levels since it joined the euro zone 11 years ago.

The International Monetary Fund is expected to boost the €30 billion euro-zone package with a loan of up to €15 billion.

Markets initially reacted positively, sending yields on Greek sovereign debt sharply lower. But in afternoon trade, yields on short-term debt climbed, with two-year yields up nine basis points at 10.23, just shy of Thursday’s record intraday highs of 10.56 per cent.

Ten-year yields, 17 basis points down on the previous close, fell to 8.67 per cent.

The euro rallied from a one-year low of $1.3199 against the dollar, rising 0.6 per cent to $1.3370.

“These measures push the problem forward,” said Mark Schofield, head of interest-rate strategy at Citigroup Global Markets in London. “This is just sticking plaster, and there will have to be some kind of restructuring of their debt.”

Evolution Securities analyst Elisabeth Afseth said: “I don’t really understand why the news that they asked for money changed anything. [Greece] still needs more to convince markets it can turn its fiscal position around.”

Steven Major of HSBC said the problem for the bond market has been a lack of new investors.

“Removing the €30 billion financing pressure for this year, together with the impact of some of the redemptions flowing back into a very cheap market, should provide the catalyst the market needs to recover,” he said.

“Furthermore, with yields close to 9 per cent, Greece can now attract flows from investors that would not previously have considered buying.”

UniCredit Group chief economist Marco Annunziata said several months of successful adjustment might be needed to convince the markets that debt sustainability is within reach and a restructuring can be avoided.

“The €45 billion package would keep them going for at least 15 months and potentially they can avoid a restructuring,” said Vincent Chaigneau of Société Générale. “But even with the liquidity mechanism triggered, there is still a question of whether they can avoid a death spiral.” – (Copyright The Financial Times Limited 2010)