Record-high bond yields point to debt restructure
Published 27/04/2011 | 05:00
THE yield on Irish, Greek and Portuguese government bonds all hit new highs last night amid growing fears that Europe will see sovereign debt restructured in the coming two years.
Momentum towards a Greek restructuring is rising, largely due to a steady drip of commentary out of Germany.
The latest record yields further damage hopes that any of the three most distressed euro countries will be able get back to normal borrowing in the markets to finance their government spending.
Last night Greek debt was the worst affected, with the cost of borrowing over two years rising to a staggering 23.67pc.
Greek 10-year yields reached 15.26pc, another record.
The yield on two-year Irish bonds reached 11.5pc, with Portugal's two-year yield at 11.39pc.
Ten-year bond yields are slightly lower, at 10.4pc for Ireland and 9.4pc for Greece.
The latest market momentum means the trend seen at the end of last week has continued. It became more pronounced on Monday after Lars Feld, an adviser to German Chancellor Angela Merkel, said Greece would not be able to avoid restructuring its debts.
"I don't think that Greece will succeed in this consolidation strategy without any restructuring in the future," he said.
"I think that Greece should restructure sooner rather than later."
Last January Mr Feld said that Germany should budget for the impact of a Greek default by putting away cash to cover guarantees.
The latest increases in yields prompted bond clearing house LCH Clearnet to increase the cash deposit it takes from people borrowing against the Irish and Portuguese bonds.
In a statement LCH said it would increase the Portuguese "margin" or cash deposit to 35pc from 25pc. The Irish margin will increase to 45pc from 35pc, the company said.
LCH Clearnet made the move after the spread, or difference between German borrowing costs and those of Ireland and Portugal, increased.
The latest record prices are being set in an unusually quiet market, Padhraic Garvey, head of government debt at ING Bank, told the Irish Independent. "The markets are actually quiet so we're certainly not seeing a big sell off of the bonds, but the path of least resistance is for the yields to keep rising," he said.
Back-to-back bank holidays across much of Europe prompted many bankers and traders to take holidays this week -- especially in the UK where next Friday is an extra bank holiday thanks to the royal wedding.
Nevertheless, he said the latest large swing against Ireland and the other distressed peripheral's was damaging.
"It matters because the ideal scenario is that these countries come back to the markets, and every day it widens that becomes more remote," he said.
There is now little or no prospect of Ireland issuing bonds this year, or even next year.
"Investors know there is value in Irish bonds right now, but there is still no market to speak of," Mr Garvey said.
Buyers have focused instead on buying the bonds of the strongest eurozone countries, and on the likes of Spain and Italy.
Current prices mean that if Ireland tried to borrow in the market today it would cost more to borrow over two years than over 10.
That is the opposite of normal markets -- where risk and therefore reward gets higher for longer dated bonds.
It is reversed today because there is a threat Ireland could be forced into a default in 2013, if the markets are still shut when the current bailout ends.