Fight Among Greek Creditors Over "Explosive" Debt Sends Greek Bond Yields Soaring

Greek 2Y bond yields soared, approaching 10% for the first time since September 2016, as an increasingly bitter fight between the nation’s creditors over its fiscal targets raised concerns it is running out of time to complete another review of its bailout program, and even sparked concerns a 4th Greek bailout may be in the offing. According to Bloomberg, the yield on Greek notes due in 2019 rose 79 basis points to 9.72% in afternoon trading in Athens. This particular issue was sold in April 2014 as part of a series of flagship sales that marked Greece’s "triumphal", if brief, return from market exile.

The yield on the 2019 notes, which was below 4% in 2014, climbed to as much as 37% in 2015, when failed negotiations led to a referendum that threatened Greece’s position in the euro-area.

The reason for the latest selloff - which due to the illiquid nature of Greek bonds may well be just one holder selling oddlots - is the ongoing stand-off with European authorities over the terms and future of Greece’s bailout has led to a rare public split on the International Monetary Fund’s board, amid growing questions over the fund’s participation. European institutions and the IMF have for more than a year been at loggerheads over what the fund argues are far too stringent fiscal targets being demanded of Athens by its European creditors and calls by the IMF’s staff for Greece to receive more long-term debt relief, the FT writes.

As Bloomberg adds, the talks with creditors for the completion of the second review of Greece's 86 billion-euro ($92 billion) bailout program has been stalled over significant differences between the IMF and euro area on projections for its economy, targets and debt sustainability. A deal between creditors is needed by a meeting of euro-area finance ministers in Brussels on Feb. 20, before the Dutch elections on March 15. After that, reaching a deal could become even trickier, with major maturities emerging which could force Greece into another technical default.

Greece won’t meet fiscal surplus targets set by its euro area creditors, the IMF warned on Monday, after executive directors met to discuss the fund’s annual assessment of the nation’s economy. The IMF’s assumptions aren’t based in reality and don’t take into account the reform of Greece’s public finances, according to a European Union official who spoke on condition of anonymity because the discussions are sensitive. To be sure, the IMF's assumptions are rarely if ever "based in reality", however markets are spooked by the increasingly acrimonious and public split among members of the Troika.

“It all hinges on talks with creditors which is typically a very difficult type of risk to price for investors,” Antoine Bouvet, Mizuho International interest rates strategist said by e-mail. “It is possible to imagine that some investors prefer waiting for the uncertainty to be resolved before re-investing this market.”

European institutions and the IMF have for more than a year been at loggerheads over what the fund argues are far too stringent fiscal targets being demanded of Athens by its European creditors and calls by the IMF’s staff for Greece to receive more long-term debt relief. The battle has raised questions over the IMF’s financial involvement in the current €86bn bailout, with German officials again on Monday saying that without the fund’s participation the rescue programme would end, potentially causing a new funding crisis for the government in Athens.

In an as-yet unpublished report on the Greek economy, the IMF’s staff argue that Greece’s debts are unsustainable and on an “explosive” path to reaching almost three times the country’s annual economic output by 2060.  But that report, the FT writes, has been labelled overly gloomy by European officials. Moreover, after a meeting to discuss it on Monday the IMF issued an unusual statement conceding that its board was split over its findings.

“Most” of the 24 board members “agreed with the thrust of the staff appraisal” contained in its regular “Article 4” review of the Greek economy, the IMF said. However, “some . . . had different views on the fiscal path and debt sustainability”.

“Most directors agreed that Greece does not require further fiscal consolidation at this time, given the impressive adjustment to date which is expected to bring the medium-term primary fiscal surplus to around 1.5 percent of gross domestic product,” the IMF said. “The interesting thing was that ‘most’ directors didn’t ask for more austerity but just for a budget-neutral policy re-balancing,” said Thanassis Drogossis, an analyst at Athens-based Pantelakis Securities.

The IMF’s report is based on assumptions that are incorrect and misleading and would lead to the IMF having an inaccurate analysis of Greece’s debt sustainability, the EU official commented. Euro area considers the country’s debt to be sustainable after the implementation of the short-term debt measures decided by the Eurogroup.

On Tuesday, Greek government spokesman Dimitris Tzanakopoulos told reporters in Athens that Greece will only agree to bailout measures that are socially sustainable and will allow the country’s bonds to be admitted to the European Central Bank’s Quantitative Easing program. The IMF is causing needless delays, and the government will take initiatives in the coming days to try to bridge the differences between the sides, he said. The standoff is the latest in a long line of disputes that have buffeted Greek bonds since the nation regained market access.

“Despite Greece’s enormous sacrifices and European partners’ generous support, further relief may well be required to restore debt sustainability,” the IMF insists, adding that debt relief needs to be complemented with strong policy implementation to restore growth and sustainability.

As of this moment, there is little clarity on what happens next. A recent report from Credit Suisse laid out five possible scenarios, ranging from the benign to the horrific, as follows:

  •     Scenario 1:Quick resolution (in the coming days)
  •     Scenario 2: “We need more time” (March-April)
  •     Scenario 3: brinkmanship (July)
  •     Scenario 4: Early elections (before the summer)
  •     Scenario 5: Grexit? Oh pleeease!

A timeline of key events in the coming weeks will help investors as they gauge the risk of yet another Grexit: