Greece reform proposals push southern eurozone bond yields lower


Italian, Spanish and Portuguese bond yields fell by up to 20 basis points on Friday after Greece sent a package of reform proposals to its eurozone creditors in a last-ditch attempt to get new funds and avoid bankruptcy.

The Greek government has asked for 53.5 billion euros to help cover its debts until 2018, a review of primary surplus targets and a "reprofiling" of the country's long-term debt.

In turn, Athens bowed to demands to phase out tax breaks for its islands and to raise taxes on shipping companies. The government will seek a parliamentary vote on Friday to endorse immediate actions.

The market sees the reform proposals as a step towards reaching a deal at the weekend and avert the risk of Greece's running out of money and crashing out of the eurozone.

The "Grexit" risk has never looked greater than it was at the start of the week, after Greeks took the advice of Prime Minister Alexis Tsipras and voted “no” in last Sunday's referendum on EU-prescribed reforms.

"The 'no' in the referendum appears to be turning into a 'yes' from Tsipras," Commerzbank analyst Markus Koch said.

Italian and Spanish 10-year yields fell 14 basis points each to 2.03 percent. Portuguese yields fell 22 bps to 2.71 percent.

The three indebted eurozone countries are the most vulnerable to the Greek crisis, but so far contagion has been limited – the European Central Bank's trillion-euro bond-buying stimulus program has capped borrowing costs.

"Although experiences of the past caution against too much optimism as there have been many unexpected twists and turns, chances for a deal and another bailout for Greece have increased again," said Carsten Brzeski, chief economist at ING.

The creditors have not commented on the merits of the latest Greek offer. Finance ministers of the 19-nation euro area will meet on Saturday to decide whether to recommend opening talks on a new bailout. Eurozone leaders will take a final decision at a summit on Sunday.

Ten-year German Bund yields, which set the standard for eurozone borrowing costs, rose 8 bps to 0.81 percent, as appetite for low-yielding, top-rated assets vanished.

Contributing to the upbeat mood in financial markets, Chinese stocks rose strongly for a second day on Friday, buoyed by a barrage of government support measures.

"Together with further relief from China, 'risk-on' should be prevailing ahead of the decisive weekend," Koch said. [Reuters]