Diminishing Greek bond yield inversion show default fears easing

Investor concern that a new government may push Greece toward another default appears to have eased over the past week, as a sharp inversion in its borrowing costs diminishes.

The latest polls still show the leftist Syriza party maintaining a steady lead before elections on Jan. 25, but fears have abated that they will lead the country out of the euro — a move that most believe would result in a debt writedown.

Analysts say the best gauge of market expectations of default is the gap between how much a country pays to borrow over the short term and what it pays over a longer term.

In normal circumstances, it pays more to borrow over 10 years than over three because investors have more certainty that it will be able to repay near-term debt obligations than those far into the future.

But for the past month, Greek three-year borrowing costs have been higher than those for 10 years — a sign that investors fear they may not get all their money back.

This inversion has diminished by nearly 4 percentage points over the last six trading days. It has returned to levels seen before the first of three Greek presidential votes among lawmakers in December in which the government failed to win enough support for its candidate, triggering national elections.

The inversion became most acute after Germany and France took a calculated risk with talk of the country leaving the euro on Jan. 6, but since then European policymakers have been trying to quell «Grexit» fears.

Syriza leader Alexis Tsipras insists he wants to keep Greece in the euro, but demands an end to painful economic measures imposed by foreign creditors and the cancellation of part of the bailout dues.

Many of the headlines over the last week, however, suggest that Syriza would be open to negotiation with its European partners and might moderate its stance in government.

“The market is coming to the realization that what Tsipras would like to do and the realpolitik are quite different,» said RBS strategist Michael Michaelides.