Bond spread is ‘unjustified’

The high spread of Greek government bond yields over benchmark German yields is unjustified and the result of unfounded speculation that Greece might leave the eurozone, Economy and Finance Minister Yiannis Papathanassiou said yesterday. The head of the Public Debt Management Agency (PDMA), Spyros Papanicolaou, said meanwhile that he expects spreads – the relative premium Greece must pay for its borrowings – to narrow and that the government will meet its finance needs. «The increase in spreads is not justified on the fundamentals of the Greek economy,» Papathanassiou told journalists and investors in London. He said market psychology and unfounded speculation about Greece’s membership of the eurozone were to blame for the widening in the Greek/German 10-year spread to over 300 basis points last month. There was «absolutely no question» of the country leaving the eurozone, particularly at a time of economic and financial turbulence, added the minister. Greek government debt is equivalent to about 94 percent of economic output, higher than the 73 percent average for countries that have adopted the euro. Combined public and private debt is 173 percent of gross domestic product, compared with an average of 165 percent for European Union countries. The fallout from the worldwide credit crisis is battering Europe’s economies, prompting ratings companies to reassess the risk to investors of holding the debt of some governments. Standard & Poor’s cut Greece’s rating last month to A-, the lowest grade among the 16 nations using the euro and six levels below the highest. Greece has met 35 percent of its refinancing requirements for 2009 less than two months into the year. «There is a misperception in the market that we won’t be able to finance our needs,» said Papanicolaou. «We are way ahead of the curve.»

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