Greek bond rebound masks stark economic reality

May 15, 2013

Ten-year Greek government bond yields tumbled to their lowest in nearly three years one day after Fitch upgraded the country’s sovereign credit ratings.

Borrowing costs fell to 8.21 percent – the lowest since June 2010, just after Greece received a bailout from the International Monetary Fund and European Union. The difference between 10- and 30-year yields was also at its least negative since that time.

The move comes after Fitch Ratings raised Greece to B-minus from CCC citing a rebalancing of the economy and progress in eliminating its fiscal and current account deficits that have reduced the risk of a euro zone exit.

The fall in borrowing costs suggests investors are pricing out that possibility, as well as the prospect of another debt restructuring, analysts say.

But the move has also coincided with a broad fall in euro zone borrowing costs in April fuelled by abundant central bank cash in the financial system. Thin liquidity in a debt market that was restructured in March 2012 also likely exaggerated the fall, say traders.

According to Athanasios Ladopoulos, chief investment officer at Swiss Investment Managers:

The euphoria that exists in the markets overall has slipped into Greece as well without necessarily (being) realistic because Greece has not resolved the major issues that we have.

It’s just euphoria spilling over and that’s the most dangerous thing because if the environment in Europe, which is dreadful in my opinion, gets even worse then suddenly Greece will find itself in a position like a slightly inflated balloon which will be likely to pop.

Data released on Wednesday showed Greece’s economy shrank 5.3 percent in the first quarter, extending a slump, now in its sixth year, that many economists call an outright depression. Overall unemployment was at an all time high of 27 percent in February, with nearly two-thirds of Greek youths now jobless.

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