Greek bond yields rose on Tuesday on reports that the International Monetary Fund may cut a funding lifeline to Greece unless its European partners accept more debt writedowns.
The warning, reported in the Financial Times to have been made by the IMF’s European head, Poul Thomsen, to euro zone finance ministers at their meeting in Riga last month, came amid negotiations between cash-strapped Greece and international creditors on reforms needed to unlock new aid.
It is said to be based on data that shows Athens’ budget surplus is set to turn into a deficit this year, a further blow for a country on the brink of bankruptcy.
Sources told Reuters that the IMF was not specifically pushing for another round of debt relief, rather outlining the options facing Athens and its creditors if its fiscal mathematics did not add up.
“I do not believe he (Thomsen) was advocating debt relief, but rather illustrating the options. In the past he has argued that as long as the debt servicing burden was low, a haircut on the principal was beside the point,” said one source briefed on the IMF’s position in the meeting.
The only kind of debt relief that the euro zone has shown willingness to consider so far is extending the maturities of loans to Greece, further reducing the interest rate on the original loans, and possibly extending the moratorium on interest payments.
Greek 10-year yields rose 26 basis points to 10.92 per cent, having hit a two-month low of 9.84 per cent on Monday, while two-year yields were up 84 bps at 20.37 per cent.
Other low-rated debt in Portugal, Italy and Spain also suffered, while a sharp selloff in safe haven German bonds abated.
Portuguese 10-year yields rose 4 bps to 2.13 per cent, while Italian and Spanish equivalents edged up 2 bps to 1.54 and 1.53 per cent.
“The FT story is bringing back some risk aversion,” said UniCredit strategist Luca Cazzulani.
“In the last days there was quite an improvement in mood about Greece, so this could mark a bit of a slowdown in things and could be a reason for investors to take a more prudent approach.”
Strategists said rumors that Spain would issue a new 30-year bond in the coming weeks was also weighing on the market, as investors made room for the new supply.
Having risen nearly 30 basis points over the last three trading days to touch levels not seen since mid-January, German 10-year yields edged down 12 bps to 0.43 per cent on Tuesday.
Strategists said the rise in yields was driven by easing deflation fears, strong US data boosting prospects for a US interest rate hike, and renewed hopes for a financing deal to keep Greece afloat.