Market turmoil as fear of Greek default grows
FEARS that Greece is edging closer to a default on its government debt sent the bond markets into turmoil yesterday. The news undermined Ireland's efforts to reap any benefits from progress on the IMF/EU deal.
The yield, or borrowing cost on Greek two-year bonds surged to 20pc yesterday on fears the country might not be able to avoid default.
The yield on Irish government debt due to be repaid in 2013 rose by half a percent from 8.71pc to 9.25pc.
The Greek government denies planning to restructure its debt, and those denials were backed up by the German finance ministry yesterday.
But there are growing fears that some level of Greek default is only a question of time.
Greece has to borrow to finance its deficit in 2012, after its current IMF/EU bailout ends, but the country is still locked out of the markets.
The European Stabilisation Mechanism (ESM) was created last month to deal with future bailouts, but if Greece needs aid from the new fund, it must show its debt is on a sustainable path -- or it will be forced to default on older loans.
That tough regime is not supposed to be in place until mid-2013, but the political success of the anti-bailout True Finn party in Finnish elections has convinced investors that there may be no European loans available under the old regime when Greece seeks funding next year.
Yesterday the yield on Greek government debt due to be repaid in May 2013 shot up from 14pc to 20pc as investors bet that the tougher new regime will now be brought forward.
Brian Barry, a bond market analyst at Evolution Securities in London, said: "If a Greek default happens . . . it will cut short Ireland's opportunity to repair its balance sheet."