While Greek leaders are proclaiming victory, intending to exit the bailout plan early and fund themselves in the public marketplace - just as they did in April (despite record poverty, unemployment, and suicides); it appears investors are a little less sanguine about the prospect. Greek bond yields have topped 7% for the first time since March and any gains from the 5Y bonds sold to hedge funds in April have now gone (and Greek stocks are at 13-month lows). The driver of recent weakness appears to be fears over whether Draghi's OMT will ever be real enough to monetize Greek debt [11] and a re-rating based on more standalone risk if Greece were to exit the bailout program early.
As Bloomberg reports,
Greece’s government bonds declined, pushing 10-year yields above 7 percent for the first time since March, after euro-area finance ministers clashed with the nation’s leaders over their desire to sever a bailout program.
Greek 10-year bonds fell for a second day and the nation’s stock index tumbled to the lowest in more than a year. Ministers are watching Greece “with a certain skepticism and concern,” Austrian Finance Minister Hans Joerg Schelling said yesterday. The euro area’s second-biggest bond rally this year is slowing amid concern Greece won’t be able to finance itself at sustainable rates without the support of its regional partners. Benchmark German 10-year yields dropped to a record.
“We are starting to approach yield levels where doubts are starting” about Greece’s ability to finance itself, said Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt. “There is a lot of uncertainty in the market and that is helping to increase pressure on Greek bonds.”
As we warned yesterday, [11] decisions on the legality (or reality) of OMT are weighing on peripheral bonds (most notably GGBs):
While a ruling on the legal questions forwarded by Germany’s Constitutional Court is not expected this year, the hearing and questions posed by EU judges may give some early insights into their views and to what extent they might share the view of the German court that, unless several restrictions are imposed, the OMT should be considered illegal under European law.
European Court of Justice scheduled to hear testimony on the ECB’s OMT on 14 October
The ECJ has scheduled a hearing on the ECB’s OMT for next Tuesday, 14 October (starting at 9am CET), which we expect to last all day. Under the OMT, the ECB could purchase, without limitation, bonds of a member state that has entered into an ESM aid programme and agreed to be subject to its conditions. Earlier this year (see German Constitutional Court's referral of key legal OMT aspects to European Court of Justice is good news, 7 February) the German Constitutional Court (GCC) in an unprecedented move referred a long list of questions to the ECJ (see Appendix below) for a preliminary ruling after it declared admissible a constitutional complaint by some 30,000 plaintiffs (Gauweiler and others) against the OMT. The discussion and specifically questions posed by the EU judges to the parties involved (the ECB, etc) during the hearing might give some early insight on their views. We do not expect the ECJ to come to a ruling this year but the court’s advocate general may announce the schedule for the proceedings next week. Usually, it takes the ECJ about 16 months on average to rule on cases referred by national courts which implies that the OMT ruling could come by June.
German court insists on several restrictions for the OMT
The German constitutional court put some pressure on the EU court and made clear its view last February that there are important reasons to assume that the OMT would be illegal under EU law as it exceeds the European Central Bank’s monetary policy mandate and violates the prohibition of monetary financing of the budget, unless certain restrictions are imposed. These should require “that the acceptance of a debt cut must be excluded, that government bonds of selected Member States are not purchased up to unlimited amounts, and that interferences with price formation on the market are to be avoided where possible.”
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It appears that fear is being seen in the riskiest of risky bonds that have been bid to the moon alice on the back of OMT hopes... 5Y GGB traded over 104 in September and is now back under 99...
[12]
and stocks have crashed back to 13-month lows...
[13]
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Let's see the Greek leaders push for a bailout exit when yields break 8, 9, or 10%!
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On the bright side, at least the Greeks are now competitive with Zee Germans...
[14]
Charts: Bloomberg
