Markets hold breath as 'Greek question' lingers
Fears of debt-market chaos are unfounded as ECB puts restructuring genie back in bottle, for now
FEARS the debt markets would spiral out of control failed to materialise yesterday with trading calmer, but bond yields stuck close to record highs as big questions over the euro crisis in Greece remain unanswered.
The yield on 10-year Irish government bonds ended the day at 10.7pc, close to the previous day's record high.
Greek 10-year bonds fell slightly from 16.8 to 16.5, but the day was more notable for what did not happen than anything that did.
A dramatic sell-off in the markets on Monday had prompted speculation that a Greek restructuring announcement could be imminent.
Instead, yesterday saw a concerted effort across Europe to put the restructuring genie back in the bottle.
European Central Bank Governing (ECB) council member Christian Noyer ruled out a restructuring of Greece's debt.
It would be a "horror story" that would leave the nation shut out of financing for years, said Noyer, who is the governor of the French Central Bank.
"There's no solution possible" for Greece other than its austerity programme, Noyertold reporters in Paris.
The comments came as Greek prime minister George Papandreou's government announced a new package of spending cuts and state-asset sales yesterday.
Markets have been in crisis in recent days with ECB leaders and European Union policymakers clashing over how to prevent the currency region's first default, but the ECB appears to have won the argument, at least for now.
"The belief in the market is that Greece will have to restructure, but I think the legislators will string it out for two years in order to give Ireland and Portugal time to distance themselves," ING Bank's Padhraic Garvey told the Irish Independent.
He said the perception that the ECB and European political leaders were at odds over the issue was overstated.
Yesterday ratings agency Moody's appeared to back the ECB assessment, saying even a so-called "soft restructuring" would have serious ramifications.
Moody's said it would regard any restructuring of the Greek debt as a default.
It said that would leave Greek banks dependent on the ECB for the foreseeable future and would hurt other peripheral euro zone economies -- including Ireland, which would suffer ratings downgrades as a result.
The market reaction to the Moody's statement was actually positive.
There is also a sense that the Moody's view could help turn political leaders away from efforts to force lenders to take a hit on the Greek debt.
The Moody's view was taken as a sign that credit default swaps (CDS), a type of insurance taken out by bondholders, would pay out on a default.
There have been fears that expensive bond insurers would not have to pay out if Greece did a soft restructuring.
The cost of insuring Greek government debt hit a new high of 15pc per year last night, but it is hard to determine whether that's because investors think the bonds are riskier or the insurance is more safe.
In spite of the latest crisis, the EU sold €4.75bn of 10-year bonds yesterday at a yield of 3.5pc and priced better than market expectations, thanks to strong investor demand.
The proceeds of the sale will be used for bailout loans to Ireland and Portugal.
The new bond deal priced with a lower yield that analysts had expected, a sign that the debt crisis has not yet hit the highest rated euro bonds sellers.
Asian investors bought 25pc of the bonds, but the bulk of the debt will remain in Europe. France took 22pc of the new bonds; Germany and the UK took 15pc each.