The Greek debt crisis flared up again this week, with the yield on ten-year Greek government paper rising sharply to 7.2%, an 11-year high. The ten-year spread over German bunds reached 4%, the highest since Greece adopted the euro in 2001. The reason for the jump was a rumour that Greece was seeking to renegotiate a potential rescue package involving both EU and IMF loans, although the Greek government denied the story. News that Germany wanted Greece to pay higher rates than expected on any emergency loans also undermined confidence.
What the commentators said
Even before this week, yields had been “creeping higher”, said Capital Economics. That shows the markets were “far from convinced” that Greece’s problems were over. Greece has to refinance e20bn by the end of May, yet it is becoming harder and harder for it to sell its bonds, said Carl Mortishead in The Times.
There was only just enough demand to cover a €5bn bond issue last week and with dwindling appetite in Europe, the country is planning to launch a high-yield dollar-denominated bond aimed at US emerging market investors. “Interest rates are very high and it’s clear we cannot continue like this for a long time,” said finance minister George Papaconstantinou.
Indeed not, said Buttonwood on Economist.com. Two-year yields of around 6% and ten-year rates at 7% “are just unaffordable” as “they are higher than any plausible rate of GDP growth”. That means Greece looks set to get stuck in a debt trap as interest costs eat up more and more of GDP and the overall debt pile grows as a proportion of GDP. It looks as though “the EU’s commitment to the Greek government is about to be put to the test”.