Greek borrowing costs shot up on Tuesday as markets became increasingly worried that a European bailout plan would prove insufficient to contain the country’s debt crisis.
A Finance Ministry official and a senior government official denied reports that Athens was seeking to revise a deal hammered out last month which would provide Greece with bilateral loans from eurozone countries and the International Monetary Fund to avoid default.
But the market jitters sent borrowing costs sharply higher, with the interest rate gap, or spread, between Greek 10-year bonds and equivalent German issues surging to 406 basis points, or 4.06 percentage points Tuesday afternoon from about 3.40 points on Tuesday morning. The spreads narrowed in late afternoon to 3.84 points.
German bonds are considered a benchmark of safety, and the widening spread means that investors are demanding higher and higher interest rates in return for holding Greek debt they see as carrying a greater risk of default. The government has been able to borrow money by selling bonds but has said it cannot go on paying high interest rates.
The Greek officials, who spoke on condition of anonymity in line with policy, denied reports that Athens was seeking to avoid IMF participation in the deal. Greece respected the March 25 agreement, the officials said.
“Today’s 60 basis points surge in Greek government bond yields underlines yet again the continued precariousness of the troubled economy’s position,” said Jonathan Loynes, chief European economist at Capital Economics.
Mr. Loynes said that although the spike in bond yields appeared to have been triggered by the reports that were later denied, “yields had been creeping higher again over the last week anyway, suggesting that markets were far from convinced that the package spelt an end to Greece’s troubles.”
A bailout agreement with eurozone leaders on financial assistance has so far failed to convince markets that Athens is on the road to recovery.
A lack of detail on the bailout plan, looming debt repayment deadlines, and modest demand for euro5 billion worth of seven-year bonds sold on March 29 have maintained market uncertainty. The plan offers loans from eurozone governments and the IMF, but only if all 16 euro countries agree - including Germany, which has steadfastly opposed bailing out Greece. The loans would come only if Greece could not borrow from any other source and did not make any money immediately available.
On Wednesday, inspectors from the IMF are due in Athens to review progress in government austerity cuts. Greece has promised draconian fiscal reforms to reduce debt but remains under pressure from high borrowing costs.
The two delegations from the IMF are expected to stay for about two weeks and will meet this week with Finance Minister George Papaconstantinou, Finance Ministry officials said. They will also review an overhaul of Greece’s tax system.
Shares on the Athens Stock Exchange also suffered, with the general index down 2.8 percent at 2,035.94 in late afternoon trading.
Greece must borrow euro54 billion ($72 billion) this year, but has so far raised less than half of that amount on the international markets. It needs to roll over some euro20 billion ($27 billion) in debt in April and May.
The IMF is helping oversee tough inspections of Greek public finances, along with the European Commission and European Central Bank. The next assessment of Greece’s progress is due in mid-May.
