Greek Bonds Fall as EU Says Budget Deficit Forecast Unreliable
Written on January 15, 2010
Greek bonds fell after the European Commission said there have been “severe irregularities” in the nation’s statistical data, leaving the accuracy of the European Union’s largest budget deficit in doubt.
The declines drove the yield on Greece’s two-year note 16 basis points higher, the most in almost a month, after the commission said in a report today “the lack of reliability and the shortage of evidence supporting the deficit figure reported” in two revisions by the government in April and October left the data “in question.” An International Monetary Fund team arrived in Greece today to aid the government in its efforts to tame the deficit.
“You have all these stories about the IMF visiting Greece, the European Commission and a reversal in risk appetite” hurting bonds, said Peter Schaffrik, an interest-rate strategist at Commerzbank AG in London. “A combination of these factors will weigh on Greece.”
The EU is stepping up scrutiny of Prime Minister George Papandreou’s efforts to tame a deficit forecast to be equivalent to 12.7 percent of the country’s gross domestic product this year, more than four times the region’s set limit. EU President Herman van Rompuy will hold talks with Papandreou today, a week after an EU team spent three days in Athens.
“Unless the institutional weaknesses identified in this report are addressed and proper checks and balances introduced, the reliability of Greek deficit and debt data will remain in question,” the EU said in its report today.
Yield Premium
The declines for Greek bonds drove up the extra yield investors demand to hold the country’s 10-year notes instead of similar-maturity German bonds, the benchmark European securities, by 14 basis points to 232, the highest since Jan. 4. The difference averaged 55 basis points over the past 10 years.
Credit-default swaps on Greece rose 20.5 basis points to 276, according to CMA DataVision prices. That means it costs $276,000 a year to protect $10 million of the government’s debt from default for five years.
Papandreou’s government will complete this week a new deficit-reduction plan that aims to cut the shortfall to within the EU’s 3 percent limit in 2012 and avoid punishment under the EU’s excessive-deficit procedure. The plan will be presented to the Brussels-based commission this month and European finance ministers will rule on the measures at a meeting on Feb. 15-16.
Today’s report marks the EU’s latest challenge to Greek statistical data, after revisions in 2004 indicated the country shouldn’t have qualified to join the euro. Greece has met the EU’s deficit target once since joining the euro, according to Commission figures in November. That was in 2006, when the shortfall was 2.9 percent.
Earlier Revisions
“The most recent revisions are an illustration of the lack of quality of the Greek fiscal statistics and of Greek macroeconomic statistics in general and show that the progress in the compilation of fiscal statistics in the country, and the intense scrutiny by Eurostat since 2004, have not sufficed to bring the quality of Greek fiscal data to the level reached by other EU Member States,” the report said.
Concern about the government’s worsening finances prompted Fitch Ratings, Moody’s Investors Service and Standard & Poor’s to all cut the country’s creditworthiness in December and fueled investor concern about a possible debt default.
The difference in yield between Greek and German 10-year government debt widened to 276 basis points on Dec. 21, the most since March 17.
Greece’s deficit has prompted speculation from some investors that the rest of the EU would save the country from default if such a move were necessary. The EU will support Greece’s efforts to tame the deficit, Spanish Prime Minister Jose Luis Rodriguez Zapatero, who holds the EU’s rotating presidency, said last week in Brussels.
How far support from the EU or ECB would go remains unclear. ECB Executive Board member Juergen Stark said in a Jan. 6 interview in Italian newspaper Il Sole-24 Ore that “markets are deluding themselves” if they are counting on a bailout.