ECONOMY

Greek bonds may drop as ECB restricts funding amid bailout talks

Greece’s government bonds may decline after the European Central Bank restricted direct access to its funding lines, adding to pressure on the newly-elected government to moderate its anti-austerity policies.

Greek securities already slumped since Syriza, a party committed to renegotiating the country’s debt, triumphed at Jan. 25 elections. They may extend declines because the ECB’s decision will raise financing costs for Greek banks and stiffen oversight by policy makers. Rating company DBRS Ltd. placed Greece under review, citing risks to financial stability and debt sustainability. Greek Finance Minister Yanis Varoufakis is due to meet German counterpart Wolfgang Schaeuble in Berlin.

“Now that Greek government securities are no longer eligible to be used as collateral in direct liquidity operations with the ECB, at least until a new bailout agreement is reached, demand for Greek securities may dry up,” Greg Gibbs, head of Asia-Pacific markets strategy at Royal Bank of Scotland Group Plc in Singapore, wrote in an e-mailed note. That may widen “Greek yield spreads over German bunds” and increase funding costs for the Greek government, he wrote.

The Greek 10-year yield climbed 127 basis points, or 1.27 percentage point, since Syriza’s electoral win to 9.68 percent at the close on Wednesday. It surged as high as 11.40 percent on Feb. 2, the most since July 2013. The rate on the nation’s three-year notes rose 625 basis points in the same period, to 16.33 percent.

Greece’s bonds have already come through the biggest debt restructuring in history after the then government persuaded private bondholders to write down about 100 billion euros ($114 billion) in 2012.

[Bloomberg]