Greek debt ends torrid week under pressure

Greek bonds were heading for their worst week since the country restructured its debt in 2012, as investors prepare for a possible default by Athens on its obligations to creditors.

Yields on the country's notes maturing in 2017 climbed 78 basis points to 26.28 per cent on Friday, capping a week of intensifying market pressure on policy makers in Athens as a deadline looms to unlock bailout funds.

Prime minister Alexis Tsipras' government has nearly €1bn due to the International Monetary Fund in May, along with pension and salary outlays to government employees. Without an agreement at a finance ministers' meeting in Riga set for April 24, it may not be possible to unlock funds from an already agreed bailout package before the deadline to pay the fund.

Christine Lagarde confirmed on Thursday that the IMF could not accept an informal request from Yanis Varoufakis, the Greek finance minister, for more time for the country to make its next payment. Mr Varoufakis has denied that he made such a request.

The bond market, beset by very poor liquidity and thin trading volumes is signalling a strong risk that Greece could soon technically default on some of its obligations, with dramatic consequences for the eurozone and international fixed-income markets.

"The government's budget situation and debt service schedule appear increasingly challenging," said Reinhard Cluse, economist at UBS.

"Although time is running short, there are clear indications that the eurogroup meeting in Riga on 24 April might not bring a breakthrough. In the absence of a deal in the next few weeks, the government might not be able to avoid default, which - we fear - would likely raise the risk of Grexit."

Since the week began, yields on the 2017 notes, the most sensitive area of the bond market in respect to debt negotiations - have soared more than 600 basis points and now trade at a heavily discounted price around 64, versus their face value of 100 when the debt was first sold.

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''We appreciate Germany's desire to take a tough stance against Greece, but by almost excluding the chance of a deal next week, Greece could be forced into a corner,'' said the economists. "This strategy is aimed at forcing Syriza to accept the conditions for reforms deemed appropriate by the EU. But it could backfire, by pushing Greece to a default on the IMF.''

For now, investors have sought German government bonds as a haven against broader market turbulence, driving the yield on 10-year Bunds down to a record low of 0.07 per cent on Friday.

And the divergence between Greece and its peers in the eurozone has widened in recent days - the spread between Greek and German three-year notes reached a record level since the restructure on Friday. The two securities now trade with a 2,650 basis point difference, as the German note carries a negative yield.

Investors have also pressured longer dated Greek paper, with the yield on the 10-year note, which moves inversely to its price, climbing 2 basis points to 12.45 per cent. The yield on the five-year note rose 22 basis points to 18.03 per cent.

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