Greek debt deadlock hits share and bond prices

Deadlock between Athens and its creditors triggered a sharp sell off in Greek markets on Tuesday as hopes for a bailout deal remained elusive.

Shares in Piraeus Bank and National Bank of Greece declined sharply following reports that the European Central Bank is considering a fresh limit on emergency funding, pulling Athens Stock Exchange index down to its lowest level since September 2012.

Meanwhile fears that the government is set to default pushed down prices for Greek bonds, sending yields on debt due to mature in 2017 above 29 per cent and to the highest point since issuance.

Investors are worried that Greece, led by the anti-austerity Syriza party, will fail to reach an agreement on reforms that would unlock funds before upcoming debt payments are due.

Greece must pay €200m to the International Monetary Fund on May 1 and €776m on May 12, while repaying €1.4bn of Treasury bills on May 8. It then faces even larger bills in June. Christine Lagarde, head of the IMF, has urged the country to implement the reforms to access the money.

However, Greece insists that it will not bow to demands and has sought to buy extra time by demanding cash from local governments and public sector entities to the country's central bank.

"At first glance this highlights the government's lack of funds but it also potentially defers the hard to determine one-minute-to-midnight moment where a compromise must be reached," said Lyn Graham-Taylor at Rabobank. "Our base case remains that a compromise will be reached."

With the rest of Europe's markets rallying in the wake of full scale quantitative easing by the ECB, Greece remains the stark exception.

<

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

"If you have a long position in Greek bonds you are trapped," said one dealer at a European bank. "The observable liquidity on electronic exchanges is very low. Not every trade is posted but the indications are that activity between clients and dealers is limited."

A small number of hedge funds have moved to take positions in Greek debt and Greek banks in recent years, including John Paulson's Paulson & Co, Greylock and Third Point. In February, Third Point told investors that in spite of the chaos, it believed no one wanted a Greek exit from the European Union.

However, most Greek debt is held by the public sector following the country's rescue in 2012, leaving just a small slice in the hands of private investors. According to figures from UBS just 12 per cent of Greek debt is in bond markets.

Investors say the real cause for concern is what a Greek default or exit from the eurozone might mean for the rest of the region.

"Few private investors own Greek debt any more and it is a relatively small economy," said Jim Leaviss, head of fixed interest at M&G Investments. "But they are exposed to Italy or Spain. So it is a question of what implication there may be in wider Europe."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation