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Soaring Greek bond yields signal market's doubts that bailout will be enough

April 26, 2010 | 12:48 pm

Greek Finance Minister George Papaconstantinou on Sunday warned speculators that they would “lose their shirts” betting that the country would default on its debt.

Apparently, there were enough speculators Monday willing to take him up on his offer: Market yields on Greek government bonds rocketed despite the cash-short country’s decision Friday to formally request a bailout from the rest of Europe and the International Monetary Fund.

Investors also dumped bonds of Portugal, Ireland and Spain on renewed concerns about those countries’ finances.

Greekfinmin The market yield on two-year Greek notes soared to 13.07% from 10.22% on Friday and 6% two weeks ago.

By contrast, U.S. Treasury two-year notes pay just 1.06%.

Bond yields rise as prices of the securities fall. So the continuing surge in Greek yields indicates that speculators are pushing down the prices they’re willing to pay for the debt, and that some owners of the bonds are willing to sell at those deeply depressed prices to get out.

Some investment firms are telling clients that Greece will be forced to restructure its debt -- perhaps by lowering interest payments or stretching out bond maturities -- even if Europe and the IMF come to the rescue. Those who expect a restructuring (a default by any other name) say it will be necessary because the expected $60-billion Europe/IMF package would only help Greece meet maturing debt obligations this year.

Selling pressure on Greek bonds also increased after German Chancellor Angela Merkel said her government wouldn’t approve rescue money until Greece proved that it had a “credible” plan to slash its budget deficit. The Germans had been expected to play tough, and they’re living up to that billing.

Meanwhile, Greece’s woes continue to turn up the heat on other European governments perceived to be in weak financial condition. The yield on Portugal’s two-year government notes jumped to 3.72% on Monday from 2.97% on Friday. Ireland’s two-year note yield shot up to 3.02% from 2.36%.

But European stock markets mostly took the bond markets’ troubles in stride Monday. Stocks were up 1.2% in Germany, 1.2% in France, 1.1% in Ireland, 0.5% in Britain and 0.2% in Spain. Portugal’s market, however, sank 3%, and Greek stocks slid 2.9%.

 The euro currency eased to $1.335 from $1.338 on Friday but remained above last week’s low of $1.32.

-- Tom Petruno

Photo: Greek Finance Minister George Papaconstantinou. Credit: Charlie Archambault / European Pressphoto Agency