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http://www.bloomberg.com/apps/news?sid=aL3SiaURK8dQ&pid=20601087

Greek Bonds Drop a 7th Day; Bund Spread Widens on Budget Woes 
By Keith Jenkins

April 8 (Bloomberg) -- Greek two-year notes slid for a seventh day and 
the 10-year yield premium to German bunds widened to the most since the 
euro’s debut after the nation’s finance minister failed to dispel 
concern that the government is doing enough to avoid a default. 

The decline drove the yield on the two-year note up as much as 210 basis 
points, bringing increases since the streak began to 447 basis points. 
The 10-year Greek yield rose 54 basis points, bringing its premium to 
442 basis points above bunds, the benchmark for borrowing in Europe, 
based on Bloomberg generic prices. Greek stocks fell and credit-default 
swaps on the nation’s debt rose to a record. 

Finance Minister George Papaconstantinou said there will be no need for 
additional measures after the European Union and International Monetary 
Fund put together a rescue plan last month. Greek bonds pared their 
declines as European Central Bank President Jean-Claude Trichet, who 
kept the main interest rate unchanged at 1 percent today, said a debt 
default was “not an issue” for Greece, though he said austerity plans 
must be implemented “rigorously.” 

“Greece continues to look like a slow-motion train crash,” Steve Barrow, 
head of Group of 10 currency strategy at Standard Bank Plc in London, 
wrote in a report. “The crash has not occurred yet but it is coming. 
Efforts to avoid a crash seem doomed to failure, whether it’s emergency 
loans or some other initiative. Bond spreads are likely to widen much 
further.” 

‘White-Knuckle Ride’ 

Papaconstantinou said it will take some time for spreads to narrow and 
there will be no need for extra measures to shore up the nation’s 
finances as long as Greece’s stability pact is implemented “correctly,” 
according to an e-mailed transcript of his interview with ANT1 
television. 

The spread, or extra yield, investors demand to hold Greek 10-year 
securities instead of bunds reached the most since the euro’s 1999 
introduction for a third day, based on generic data. It averaged about 
65 basis points in the five years through November before concern 
deepened that the country’s deficit would swell. 

The yield on the 10-year Greek bond rose 16 basis points to 7.40 
percent, as of 4:04 p.m. in London. The two-year note yield surged 82 
basis points to 7.78 percent. The benchmark ASE Index of Greek stocks 
slid as much as 5.2 percent, its biggest intraday decline since Jan. 12. 

“Something has got to give,” said Robin Marshall, director of fixed 
income at Smith & Williamson Investment Management in London, which 
oversees about $20 billion. “Yields at these levels raise the risk that 
Greece might have to get help in order to access funding at a subsidized 
rate. For the brave, this might be a level to buy. But it will be a 
white- knuckle ride.” 

Deficit Revision 

Papaconstantinou said yesterday the nation’s 2009 deficit will be at 
least 12.9 percent of gross domestic product, up from the previous 
estimate of 12.7 percent. The EU’s limit is 3 percent. Stephen Jen, 
managing director at BlueGold Capital Management LLP in London and a 
former IMF economist, said yesterday a default may be “unavoidable” 
without “extraordinary” financial assistance. 

Mohamed El-Erian, co-chief investment officer at Newport Beach, 
California-based Pacific Investment Management Co., wrote in the 
Financial Times that Greece’s woes will “get worse before they get 
better.” 

The cost of insuring against a default on Greek government bonds rose 
above that for Iceland for the first time. Credit- default swaps linked 
to Greek sovereign debt climbed 53 basis points to a record 468.5 today, 
according to CMA DataVision prices. Iceland, which got a $4.6 billion 
IMF-led bailout after its three biggest banks collapsed in October 2008, 
last traded at 402 basis points. 

Paring Declines 

Greek bonds pared their declines after European Central Bank President 
Jean-Claude Trichet said a debt default was “not an issue” for Greece. 
Speaking at a press conference in Frankfurt following the ECB policy 
meeting, Trichet said the nation’s austerity plans were “convincing” and 
must be implemented “rigorously.” He also said that any emergency loans 
to Greece could be made at “refinancing costs.” 

“These are the first supportive news or comments we’ve heard for Greece 
all week,” said Peter Chatwell, a fixed-income strategist at Credit 
Agricole Corporate and Investment Bank in London. “We’ve seen a bit of a 
rebound in Greek bonds as the market digests the information. In 
reality, we still don’t have a conclusion, nothing hard and fast.” 

Collateral Framework 

Trichet revealed details of the central bank’s new collateral framework, 
which includes a proposed “graded haircut” on collateral rated between 
BBB+ to BBB-. 

The ECB is also maintaining its emergency collateral rules beyond 2010 
as the fiscal crisis in Greece shows no signs of easing. The new plan 
will allow banks to exchange Greek bonds for central bank funds even if 
the country’s credit rating deteriorates further. 

Had the ECB stuck to its plan to revert to pre-crisis rules at the end 
of the year, Greek bonds would have become ineligible in refinancing 
operations in the event of Moody’s Investors Service cutting its rating 
two steps to a level comparable with other agencies. Greece is rated A2 
at Moody’s, while Standard & Poor’s and Fitch Ratings both have a BBB+ 
rating on the country’s debt. 

A haircut is the risk premium central banks apply to securities they 
accept as collateral against loans. A 10 percent haircut on an asset 
means the central bank would lend commercial banks 90 percent of its 
value. 

“Trichet is trying to preserve the current cost structure for everyone,” 
Credit Agricole’s Chatwell said. “Going forward, it will mean a haircut 
system which means you do get penalized for giving the ECB higher-risk 
paper. It’s something they can keep in place for the foreseeable 
future.” 

Portugal, Ireland 

Other non-core European government bonds pared their earlier declines as 
Greek debt rebounded. The yield on Portugal’s 10-year note climbed for a 
third day, adding 6 basis points to 4.38 percent, having risen to 4.4 
percent earlier, the highest since Feb. 26. Ireland’s 10-year bond yield 
was little changed at 4.5 percent after increasing to 4.54 percent. 
Spain’s dropped 1 basis point to 3.86 percent. 

Spain sold 2.9 billion euros of a 2.3 percent security due April 2013 at 
an average yield of 2.01 percent. Investors bid for 1.79 times the 
amount of notes on offer. 

Bonds sold by Germany, the region’s biggest economy, are used by 
investors as a benchmark. The yield on the nation’s two- year note fell 
4 basis points to 0.92 percent, after dropping a record low of 0.89 
percent. The 10-year bund yield dropped 2 basis points to 3.10 percent. 

German bonds remained higher after the Frankfurt-based European Central 
Bank kept its key refinancing rate at a record low 1 percent, an outcome 
predicted by all 62 economists in a Bloomberg News survey. 

“The market was fully anticipating that result, so it’s not going to 
have much impact on bunds whatsoever,” said John Davies, a fixed-income 
strategist at WestLB AG in London. 

To contact the reporter on this story: Keith Jenkins in London at 
Kjenkins3{at}bloomberg.net 

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