Bond markets buoyant on hopes of rescue-fund boost
Germans rule out buyback but yields fall as EU leaders plan to beef up bailout mechanism
Published 03/02/2011 | 05:00
BOND markets continued recent gains yesterday even after German officials ruled out an EU-financed buyback of Greek government bonds that could help shrink the country's debt.
Bond yields for countries including Ireland and Spain are falling rapidly on hopes Europe's heads of government meeting tomorrow can agree changes to European rescue facilities.
The yield on Greek 10-year bonds fell below 11pc on Tuesday for the first time since the start of November. It continued to fall yesterday ending the day at 10.69. Irish 10-year bonds yields fell by a fifth of one per cent from 8.84pc to 8.39pc, shrugging off a ratings downgrade.
Portugal's 10-year bond yield fell after it sold €1.255bn of short-term bonds.
Markets have been boosted by well-placed leaks in recent days, hinting that European heads of government are close to agreeing an increase in the €440m European Financial Stability Facility (EFSF).
Possible changes include allowing the EFSF to buy new bonds issued by rescued countries, instead of issuing loans to them as it has for Ireland.
That would be a halfway house between normal market funding and the current bailout mechanism.
The interest countries pay to access EFSF funds is also likely to be under discussion.
Yesterday, German officials ruled out one of the more radical measures rumoured to be under discussion, but did back a bigger rescue mechanism.
Reporters were told the EFSF lacked the legal authority to purchase the outstanding debt of countries including Greece.
This made it unlikely the EFSF would buy Greek bonds at a discount and swap them for new, easier-to-manage longer-term loans in a so-called bond buyback.
Germany is seen as a stumbling block to radical action, but an official said it would back increasing the size of the EFSF.
German officials said chancellor Angela Merkel and French president Nicolas Sarkozy would propose a package intended to boost euro-region competitiveness this week. The market shrugged off those comments and Ireland's Standard & Poor's downgrade.
The EFSF is the EU's biggest weapon for helping countries unable to borrow in the market, but is too small to help Spain or any of the larger eurozone countries if they run into trouble.
Germany is expected to demand tighter rules for individual countries' finances in exchange for increasing its support to stressed neighbours.
Hopes of a deal helped the market shrug off the Irish and Greek news as did positive economic data for Spain and Italy.
As S&P affirmed Spain's AA credit rating, albeit with a negative outlook, the difference between Spain and Germany's cost of borrowing was at the lowest level since the debt crisis flared up in November.
"The current market situation is one of expectations," Greek Finance Minister George Papaconstantinou said in an interview in Athens. "It would be a big mistake to conclude an agreement that falls short of these expectations."
The European Central Bank's (ECB) unhappiness as the bond buyer of last resort could help push borrowers also
It failed to "sterilise" some of its €76.5bn of government bonds this week.
The ECB aims to cancel out the impact of its bond purchases on the amount of money in circulation by taking in an equal amount of deposits from banks.