Business World

Sunday 21 January 2018

Stocks rally as Greece steps back from brink of default

Donal O'Donovan

RELIEF hit markets across Europe yesterday sending share prices up and bond yields down after Greek politicians voted to back €78bn of austerity measures, stepping back from the brink of default.

In a further boost for the bailed out nations, European Central Bank Executive Board member Lorenzo Bini Smaghi said the central bank was working on establishing funding plans for Greek, Irish and Portuguese banks to complete the reduction of their financial leverage.

The measures must be gradual enough to avoid credit contraction, and have firm deadlines to reduce their dependence on the Eurosystem, he said. The Greek vote sent a positive wave through the debt markets and came after the Greek parliament finally agreed to accept the conditions attached to its latest bailout deal.

The yield on Greek two-year bonds dropped by almost a full percentage point to 26.63pc on the news. The two-year bonds are most at risk in the event of a shock default. Similar dated Irish and Portuguese bond yields also fell.

Irish two-year bond yields dropped to 13pc, down by more than a quarter of a percent; Portuguese two year yields fell from 13.28pc to 12.4pc.

Ireland was also boosted after money manager BlackRock said in a survey that Ireland's government debt is a lower risk investment than Italy's. Blackrock said Greece and Portugal are the riskiest borrowers.

The cost of insuring bonds for the three countries against default also fell, though trading in the insurance contracts is understood to be very low.

Bond yields improved and shares rose across Europe, even though most analysts had expected the Greeks to pass the measures.

European shares staged the best comeback in three months yesterday.

The Stoxx Europe 600 Index of the biggest European shares was up 1.7pc at the close of business, the highest rise since March 21. Italy and Spain's yields were also better, though less dramatically.

In a further sign of better appetite for risk, the yield on German five-year bonds rose by the biggest amount in three months. German government debt is seen as the least risky in Europe by investors so its yield rises when bondholders opt for riskier trades and sell the German bonds. (Additional reporting Bloomberg)

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