Tags: Bailout, Citigroup, Debt Bomb, Don Miller, ECB, EU, Finance, Greece, IMF, PIGS, Securities

Odds of IMF Bailout Increase as Greek Bond Prices Plummet

By , Contributing Writer, Money Morning •

Prices for Greek 10-year bonds plummeted to record lows today (Thursday) on speculation Europe's most troubled economy is about to unravel.

Economists expressed new doubts over the country's banks and short term funding plans and warned that recent developments now threaten to create a vicious cycle of bad news.

"The fear factor is beginning to creep in. In fact, it's galloping in," Neil Mellor, a senior currencies analyst at Bank of New York Mellon Corp. (NYSE: BK) in London told The Wall Street Journal.


The yield on Greek 10-year bonds soared to 7.6%, raising the spread over comparable German bonds 4.48 percentage points, the widest since the euro's inception, reflecting the higher premium investors demand for taking on Greek debt.

The euro plummeted to nearly $1.33 in midday trading.  If the euro breaks through its late-March low point of $1.3270, as many suspect it now will, the currency probably is in line for a trouncing as the technical charts spur traders to join the euro-selling frenzy, The Journal reported.

The sharp rise in Greek bond yields fueled fears that the Greek government will be able to persuade investors to buy up to $10 billion in new debt to fund new government borrowing by the end of May.

Greek banks are finding it difficult to find short-term financing from inter-bank money markets, where banks lend to one another to fund normal operations. The falling value of government bonds, a main source of collateral for the banks, is making borrowing more difficult.

Due to the risk of default, other banks are holding back funds, reminding investors of the breakdown in inter-bank lending that crippled the credit markets after the collapse of U.S. investment bank Lehman Brothers Holding Co. in 2008.

The combination of falling prices and higher yields on Greek debt is pushing up the cost of insuring bonds, increasing the likelihood that Athens will ask for outside help in its struggle to fund its deficit.
"This is clearly a sign that the Greek authorities have reached the end of the line and need to make a phone call to the International Monetary Fund (IMF)." analysts at BNP Paribas SA (OTC: BNPQY) wrote in a note to clients.

European Central Bank (ECB) President Jean-Claude Trichet has already announced changes to the central bank's collateral rules to help Greece, and said that he doesn't expect the nation to default.

"I don't think that the market necessarily has incorporated all the information," he said in a television interview with Dow Jones Newswires. "What counts are the facts and the determination of the various parties concerned, including the Greek government and the governments of the Eurozone."

Greece's problems also raised concern that the debt problems may spread, and that other indebted nations in the Eurozone may struggle to meet their funding needs.

"There is now increasing uncertainty surrounding Greece's ability to raise the required amount of funding without recourse to the emergency lending facility provided by euro member states and the IMF," said Steven Mansell a strategist at Citigroup Inc. (NYSE: C) in London. "This raises the question of whether or not tensions will also rise in other peripheral markets," he wrote. "We think that some form of contagion is inevitable."

The speculation surrounding Greece's problems pushed Portugal's 10-year yield 8 basis points higher to 4.34%.

The European Central Bank (ECB) left its benchmark interest rate at a record low of 1%, as the Greek fiscal crisis complicates its withdrawal of emergency stimulus measures. A poll of economists conducted by Bloomberg shows the rate may stay there until the first quarter of next year.

Other analysts think the Eurozone's debt problems are vastly understated and that the situation is about to get much worse.

"Most of the world reads about Greece and wonders why there is so much fuss," said Mark Grant, managing director of Southwest Securities Inc. "The European Union is about to hit critical mass which will be a defining moment for America, Europe and the entire world that will have financial consequences for generations."

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