Confidence in Greek debt plunges

As the risk premium on holding Greek government debt rose to its highest since the launch of the euro yesterday, Finance Minister Giorgos Papaconstantinou said the government won’t need a rescue package to get its massive deficit under control. Greek bond spreads over benchmark German Bunds continued to widen yesterday on worries about the country’s fiscal health, traders said. They had narrowed after the Brussels weekly newspaper European Voice reported that EU officials were exploring the possibility of a loan to Athens under heavy conditions. A European Commission spokeswoman later said she was not aware of any such talks. The premium demanded by investors to buy 10-year Greek bonds rose as high as 311 basis points (bps) above Bunds, and fell as low as 276 bps before settling around 290 bps later in the day. The sharp swings highlighted nervousness over financial risk in debt-laden countries hit by the global credit crisis, such as Greece and Dubai. But Papaconstantinou sounded upbeat about the country’s ability to ride out the fiscal storm. «We are not expecting anyone to come to our rescue,» he told a bank conference yesterday.«We will be able to satisfy our borrowing requirements on international markets in the next weeks and months, according to the schedule we have.» Concerns about Greece have contributed to a slide in the euro against the dollar. The euro dropped as far as $1.4029 yesterday, the lowest in more than five months, before recovering to be little changed at $1.4104 at around 3 p.m. in London. European Central Bank President Jean-Claude Trichet, who last week stepped up pressure on Greece to shore up its finances, said yesterday that euro-area governments must cut deficits in a «timely fashion» to prevent confidence from being undermined. «Disruptive market movements related to the correction of global external imbalances remain» among the «downside risks» to the economy, Trichet said from Frankfurt. The euro will decline further, said analysts at UniCredit. «The euro has clearly become a full Greek tragedy and a self-fulfilling prophecy, with whatever bad news – lower US stocks, China’s tighter monetary policy – being an excuse to sell,» a team of analysts, including foreign exchange strategist Roberto Mialich in Milan, wrote in a report yesterday. Societe Generale: Senseless spreads Greek bonds are undervalued after declines this week and are now at «senseless» levels, according to Societe Generale. «Let’s take a deep breath and persuade ourselves that even Greece will still be standing in 10, 30, or even 50 years – unlike maybe most of the top 10 names in any equity index,» said Ciaran O’Hagan, a Paris-based fixed-income strategist, Bloomberg reported yesterday. Meanwhile, Royal Bank of Scotland’s currency strategist Alan Ruskin said that Greece’s struggle to close its budget deficit will weigh on the euro for some time yet. While the Greek government may not need immediate assistance, the nation may have to seek aid from the International Monetary Fund rather than the European Union in the future to help lower the deficit, Ruskin, head of currency strategy at RBS Securities in Stamford Connecticut, said yesterday. He advises selling the euro after it gains against the dollar. RBS is maintaining its forecast for the euro to weaken to $1.35 by year-end, he added.

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