Greek bond yields jump as negotiations reach critical juncture

Greek bond yields headed higher as the country’s cash position grew more dire and amid somewhat contradictory reports regarding the likelihood of an agreement to avert a debt default, although analysts were still sanguine that both sides would be able to reach a deal.

Earlier on Monday, Market News International reported the European Central Bank was increasingly concerned at the tone of negotiations.

So much so in fact the ECB might decide to raise the haircut it applies on Greek government debt offered up as collateral at the central bank from around 23% at present to between 44% and 80%.

That followed reports of a leaked IMF memo recognising that Greece had made progress on VAT, tax and a framework for resolving non-performing loan insolvencies.

However, the main sticking points to an agreement between Athens and its creditors, labour market and pension reforms, remained.

As well, the Washington-based lender had been insisting it would only accept reduced budget deficit targets for Greece if the EU took write-downs on the loans it has extended to Greece.

All else equal, some reports had been indicating Athens might otherwise fail to meet the $2.5bn in pension and salary payments falling due at the end of May.

Analysts wax hopeful

"the Eurogroup will find a way to avoid a ‘technical’ default"

As of Monday morning RBS's base case continued to be for an early compromise agreement with a partial release of the €7.2bn in aid still left to Greece under its previous rescue programme, the bank's analysts said in a research note e-mailed to clients."

However, in the broker's view capital controls are likely unless an agreement is reached soon."

Barclays was slightly more positive. On 15 May it told clients that under a no-policy-change scenario the country's 2015 primary balance was set to fall back into deficit. Given deflation, that meant public debt was set to climb to well over 180% of GDP.

Nonetheless, while Greek politicians’ optimism on the likelihood of a deal before the end of May struck Barclays as “very ambitious”, the Eurogroup “will find a way to avoid a ‘technical’ default [if negotiations continue to make headway].”

A partial disbursement of the ECB’s profits on its SMP programme or an increased ceiling for Greek banks’ ceiling for issuing T-bills were two of the options open to European governments, the broker added.

As of 14:28 the yield on 10-year Greek government bonds was jumping by 84 basis points to 11.47%.