Borrowing costs rise on growing default fears

Greece had to pay a higher rate to raise 1.65 billion euros on Tuesday as market pressures increased amid fears the government will have to default on its massive debt load.

The yield for the 13-week Treasury bills was set at 4.1 percent – higher than the previous auction of the equivalent bills in February, when the rate was 3.85 percent, according a statement from the Public Debt Management Agency (PDMA). The sale was oversubscribed 3.45 times.

Investors’ expectations are bleak, with the interest rate gap, or spread, with Germany’s benchmark 10-year bonds climbing to a record 11 percentage points on Tuesday.

?Price actions in the market suggest people believe there’s no smoke without fire,? Richard McGuire, a senior fixed-income strategist at Rabobank International in London, told Bloomberg.

?Greece will keep rolling over the bills, even though the costs of doing so may be rising.?

The government insists it will not restructure its debts – that is, change the terms on its debt repayments – and has promised to accelerate cost-cutting reforms.

Greece’s two-year bond yield exceeded 20 percent for a second day on Tuesday, even as officials denied the nation was preparing a restructuring.

The cost of insuring Greek sovereign debt jumped 101 basis points to a record 1,256, according to CMA prices for credit-default swaps. That indicates there’s a 65.8 percent probability of default within five years.

Meanwhile, an advisor to the German government said on Tuesday that Greece’s extremely weak balance sheet means a restructuring is inevitable.

The statements are the latest sign of conviction in the EU’s dominant economic power that Greece’s 110 billion euro EU/IMF bailout will not allow it to avoid renegotiating its debt with creditors.

Clemens Fuest, who chairs the German finance ministry’s technical advisory committee, told Reuters that Greece could barely manage to tread water since half the country’s tax revenue must now be spent simply on meeting interest payments.

“One must recognise the realities — I am expecting a haircut,» the economist said. «(The interest payments) are breaking Greece.”

The president of the Association of German Public Sector Banks said banks would be able to cope with a restructuring of Greek debt, a sign that the politically sensitive sector would not oppose such a move.

A restructuring of Greek debt would be the first by a western European nation in over half a century and represents a challenge for EU policymakers struggling to reconcile the interests of their citizens with the costly steps needed to preserve the integrity of the 17-nation currency area.

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