Bond markets hit by ongoing Greek debt fears

| April 9, 2010
Bond markets hit by ongoing Greek debt fears

There are renewed fears over the Greek debt crisis after a hammering of bond prices by investors took the yield on short-term Greek debt up to 8% yesterday – almost 3% higher than in October 2009.

There is now speculation that Greece will be seeking a bailout sooner rather than later with one analyst suggesting that Greece will now have to turn to the International Monetary Fund (IMF) for help.

However, so far the euro zone has avoided seeking an IMF loan for Greece, opting for a solution closer to home to maintain global confidence in the euro.

Furthermore, should the IMF get involved, the euro (which has already lost more than 7% against the dollar this year) is likely to de-value even further, with markets concerned that an IMF rescue will damage the euro’s credibility.

European stock markets also took a battering yesterday over concerns about Greece’s debt-ridden economy with the Athens Composite index falling by 3.1%, with banks down 6.4% on average.

Furthermore, London’s FTSE 100 index closed down 0.9%, Germany’s Dax fell 0.8%, while France’s Cac lost 1.2%.

Greece currently has the highest debt of the 16-member euro zone, at €300 billion (£273 billion) and its economy is considered to be the euro zone’s weakest.

The country is currently taking action to reduce its public deficit from 12% to 8% of GDP this year.

Its recovery plan involves borrowing on the bond markets and an austerity programme of spending cuts and rising taxes, which has led to national strikes throughout the country.

However, fears and confusion over what Greece plans to do about its debt crisis is making investors nervous.

Chris Pryce, senior Greece analyst for rating agency Fitch, comments: “It is now up to the Greek government to go publicly to the EU and IMF and ask for the cash and the support.”

In related news, yesterday the European Central Bank (ECB) elected to keep interest rates on hold at the historic low of 1% for the eleventh consecutive month, as widely expected.

Finally, official figures revealed last week that the euro zone economy stagnated during the three month period with a rate of 0%, revised down from the previously estimated 0.1%.

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