Aggressive sell-off (only) on Greek bonds

Her Eleftherias Kourtali

The yield of the Greek 10-year bond is at 4.3% and has now exceeded the level that had peaked on the morning of 18 March 2020 when the European Central Bank activated PEPP, while the spread reaches 290 p.m. and is at a 26-month high, as in March 2020 due to the still negative performance of the 10-year German bonds it had climbed to 430 bp. Although the rest of the eurozone bond market looks calmer today after yesterday’s strong sell-off triggered by the ECB announcements and the lack of any new information about the possible implementation of a new support program, Greece appears much more vulnerable. Besides, the fact that it does not yet have an investment grade is crucial as in phases of market turmoil it is essentially “revealed” which country is involved in the biggest risk and at the moment Greece, due to evaluation, is considered an investment, high risk.

With a barrage of reports, international analysts predict from yesterday that the most aggressive tightening of the ECB monetary policy – as now in July interest rate hikes above 25 bp are valued. in the coming sessions – as well as the absence of a new market support tool, are expected to lead investors to test the ECB’s determination and put pressure on the most vulnerable markets, first in Italian bonds, as well as in Greek.

As noted by Schroders, is a huge challenge for the ECB to tighten its policy without triggering a debt crisis in the periphery of Europe. The bank said its positions in government bonds under the PEPP could be flexibly reinvested to stem any significant increase in borrowing costs for governments in the region. However, government bond yields rose, indicating that the ECB announcement was more aggressive than expected. Second, the spreads increased further. This suggests that investors are increasingly concerned about the risk of a new debt crisis in the eurozone. “Although it is still early, but with the crucial elections in Italy, Spain and Greece next year, the political risk may return to intervene in the way the ECB should and can determine monetary policy. “as Schroders concludes.

And Citi notes that investors’ risk of experiencing ECB pain threshold increaseswhich could to create additional headwinds economically and politically in the run-up to the elections next year. Lagarde has not substantially strengthened its rhetoric on broader spreads between core and peripheral countries, and Citi estimates that the board is either not yet concerned about expanding spreads or has not been able to agree on how to deal with them.

According to reports, however, the vast majority of the Board opposed the announcement of a new tool to tackle fragmentation. And analysts say the ECB will first deplete its reinvestment tool and then look to a new bond-buying program.

In a speech at a conference in Paris, former chief IMF economist Olivier Blanchard and senior fellow at the Peterson Institute for International Economics, stated that he was concerned that ECB does not yet have the tools to convince investors that fragmentation is manageable. Blanchard estimated that the kind of monetary tightening the ECB might need to control inflation was less than what the Fed needed – as labor markets were much tighter in the US, so the ECB should not be tightening. theoretically a problem for debt sustainability.

However, he said bond investors still need to be convinced of this, because an excessive increase in long-term borrowing costs could in itself change these sustainability measures and create a “self-fulfilling” problem that the ECB would eventually have to deal with.

“My main concern for the ECB is that in order to convince investors that the spread will remain low, you have to convince them that you will do what is necessary,” Blanchard said. do is little and not enough, they will still demand a higher spread “. “I am concerned at this stage that the ECB does not have a process in which it can intervene sufficiently to address the problem and I suspect that this will be an issue for the next year or two,” he said.

In a recent analysis, Moody’s had warned that a mistake in the policy of the European Central Bank makes a sovereign debt crisis more likely., but is not in itself a sufficient cause to cause it. The point is, as interest rates rise, so will the debt mountains issued by governments in recent years become more and more expensive, altering the viability of that debt. In light of growing spreads, a more aggressive ECB and a slowdown in GDP growth (due to inflation and supply shocks), the risk of a new debt crisis in the eurozone has increased, he noted.

Something similar has been pointed out by Deutsche Bank stressing that “if eurozone bond yields rise sharply over a longer period of time, it may well to face Eurocrisis 2.0 “.

According to her calculations Société Générale 4% In terms of the yield of the Greek 10-year bond, it is the level that begins and becomes worrying as Debt service costs begin to destabilize the debt-to-GDP ratio.