Greek borrowing costs still rising

The cost of insuring Greece's debt against default hit a record high and its borrowing costs soared this afternoon after Germany…

The cost of insuring Greece's debt against default hit a record high and its borrowing costs soared this afternoon after Germany's junior coalition party said Berlin was not certain to put its weight behind a financial rescue.

Prospects of Greece not securing aid in time to meet a debt deadline on May 19th also stoked fears that other euro zone states might face similar problems, pushing the cost of insuring Portuguese government debt to a new high.

Market pressure on Greece has intensified since it asked for emergency help on Friday. It is now in talks with the European Union, International Monetary Fund and European Central Bank on the terms of the €45 billion aid package.

On the markets, Greek banks stocks tumbled 4 per cent and the euro slid against the dollar as investors sought clarity about the aid talks.

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Five-year Greek credit default swaps were at a record high of 736.3 basis points, meaning it costs €736,300 to insure €10 million worth of debt against default.

The Greek/German 10-year bond yield spread reached 689 basis points today, the widest since early 1998, and an increase from 657 yesterday, meaning costs for borrowing are prohibitive for Greece. This later slipped back to 668 basis points.

The Portuguese/German bond yield spread hit a euro lifetime high of 258 basis points. Portuguese CDS also hit a record high earlier today at 316.6 basis points, up from 311 yesterday.

The cost of insuring Irish and Spanish debt, likewise viewed as potentially sensitive to any worsening of Greece's debt crisis, also rose. The Irish/German 10-year bond yield spread rose from 187 basis points yesterday to 213 today.

"The markets smell blood," said Charles Diebel, head of European rates strategy at Nomura.

John Corrigan, chief executive officer of Ireland's National Treasury Management Agency, said today said he was "not unduly worried" by the movement in Irish bonds. "Ireland has addressed fiscal problems," he said today.

He added that it may not be appropriate to issue a 30-year bond now. "I don't think in these turbulent times it's the kind of measure that would be appropriate to take," he said.

German Chancellor Angela Merkel said yesterday Germany was willing to help Greece if it showed a readiness to enact new savings and put its economy back on a sustainable path, prompting calls today for more belt-tightening from the head of the Greece's central bank.

But the budget spokesman for Ms Merkel's Christian Democrats (CDU) said today the party would raise the issue of forcing investors to take a discount on Greece debt in talks with the IMF and ECB.

The backing of Germany, Europe's biggest economy, is vital for any rescue but Ms Merkel believes her party is vulnerable to losing a regional election on May 9th, depriving her coalition government of its majority in the upper house of parliament.

She wants to reassure financial markets and protect the euro but is also taking a tough line on the terms of the deal because of German public resistance to aid for Greece, and this has heightened investor uncertainty.

The head of Greece's central bank has sought to address Athens' credibility problem by suggesting it try to reduce its budget deficit by 5 percentage points of GDP or more this year, above current plans.

The government has so far proposed cutting four percentage points off the budget deficit, which was revised upwards to 13.6 per cent of gross domestic product for last year by EU statistics agency Eurostat this month.

"In order to bring about a definitive reversal of the negative trends, we must surpass ourselves and favourably surprise markets, by achieving even greater improvements than the ones projected," bank governor George Provopoulos said in a report.

But many Greeks already fear austerity measures tied to the funding will hit living standards and raise tensions in a country prone to protests, and this has increased pressure on Greek prime minister George Papandreou's government.

The first opinion poll taken since Athens requested aid showed today a majority of Greeks disapprove of the government's decision to ask for financial aid.

Of 1,400 people surveyed, 60.9 per cent said they were against the government's decision, according to the poll by Greek Public Opinion (GPO) for Mega TV.

Athens has already announced billions of euros in budget cuts, including tax increases and reductions in public sector wages, setting off violent protests and strikes.

The aid is the largest bailout ever attempted and the first for a euro zone member, but concern is growing that Greece will not be able to refinance an €8.5 billion on May 19th.

If Greece defaulted, it would be the first member of the euro zone to do so since the 16-country currency area was created 11 years ago.

Reuters/Bloomberg