GREEK bonds tumbled to new lows yesterday as a German government adviser said Greece will probably have to restructure its debt burden.
Portuguese and Irish bonds also slid after Lars Feld, a member of German Chancellor Angela Merkel's council of economic advisers, said Greek restructuring is probable.
The cost of insuring Greek government bonds against default is now above the level paid to insure Iceland's debt before that country's banking collapse in 2008.
However, Greek finance minister George Papaconstantinou said yesterday that Greece's debt is "totally sustainable", and that a restructuring was out of the question.
Irish and Portuguese bonds were also under massive pressure late yesterday afternoon, with the yields of both rising rapidly in the wake of the latest swing in Greek bonds.
Mr Papaconstantinou's comments came after a rumour that Greece was planning to announce a debt restructuring deal as early as this weekend.
"It was a wild rumour but the market is jumpy, and a lot of traders are away so you can get big jumps," said Gavan Nolan, a credit analyst at the Markit Group.
He said that timing any such major announcement about Greek debt for the holiday weekend should never have rung true with the market.
Both eastern Orthodox and western Christians share the same Easter this year.
However, many traders and analysts are already on their Easter breaks, leaving the markets less liquid and therefore more prone to big price movements, Nr Nolan said.
The deterioration in market support had real consequences as the cost of credit default swap contracts on the Greek debt hit 13pc per year yesterday.
The contracts will pay out if the Greek government defaults. The new price means investors must pay more than €6m to insure €10m of government bonds over five years.
The yield in two-year Greek government bonds surged to more than 21pc yesterday, as investors dumped the bonds and drove up the yields.
Investors are selling Greek bonds due to be repaid in 2013 because they fear the country will have to restructure all of its government debt before the bonds are due to be repaid, even if the country does get through the coming year.
If a restructuring happens the bondholders would either be paid less than they are owed or will be paid back over a longer time than agreed.
Yesterday's market was battered further when bond clearing house LCH Clearnet demanded an increased cash deposit for deals involving Portuguese bonds.
The debt of Portugal, Ireland and Greece all suffered after the announcement.
Portugal managed to sell €1bn of six-month and three- month debt yesterday at yields starting from 5.529pc.
Portugal is in the middle of talks on securing a bailout loan from the IMF and EU.
Officials from the lenders are in the country this week negotiation a bailout package that will be similar to Ireland's and is estimated to be around €80bn.
Spain sold €3.4bn of bonds yesterday.
The country's cost of borrowing rose but there was strong demand from investors for the bonds, which included some debt not due to be repaid until 2021 that sold at a yield of 5.472pc, and bonds maturing in 2024 at 5.667pc.
(Additional reporting by Bloomberg)