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Greek default fears drive up euro-zone bond yields

April 14, 2011 | 11:42 am

Europe’s government-debt crisis is flaring again, as interest rates on Greek, Irish and Portuguese bonds surge on fears that some form of default is inevitable.

Greece The annualized yield on two-year Greek notes (charted at left) jumped to 17.83% on Thursday from 16.93% on Wednesday. The yield is nearly back to the record high of 18.27% briefly reached last May, just after the European Union rode to Greece's rescue with a lending package.

Two-year Irish note yields rose to 8.83% from 8.66% Wednesday; Portuguese two-year yields hit 9.31%, up from 9.05%.

To put those interest rates in perspective, the U.S. Treasury pays just 0.74% on two-year notes.

Besides Greece, debt-ridden Ireland also has taken a bailout from the European Union. Portugal was third in line, formally asking for EU help April 6.

But EU bailout loans are intended as temporary funding. At least in the case of Greece, some investors have suspected all along that the only permanent fix for the debt debacle would be for private bondholders to forgive some portion of what they are owed.

German Finance Minister Wolfgang Schaeuble suggested as much in an interview Thursday with the newspaper Die Welt.

From Bloomberg News:

Schaeuble said Greece may have to seek debt restructuring if an audit in June questions its ability to pay creditors, Die Welt reported, citing an interview.

Greece would have to negotiate to ease its debt burden since creditors can’t be forced to take losses until Europe’s permanent rescue system for the euro starts up in mid-2013, the Berlin-based newspaper cited Schaeuble as saying in comments published today.

“We will have to do something” if the review by the International Monetary Fund and European authorities in June raises doubts about Greece’s “debt sustainability,” Schaeuble was quoted as saying. “Then, further measures will have to be taken.”

A Greek government spokesman said the country had no plans to seek a debt restructuring.

Mohamed El-Erian, chief executive of bond fund giant Pimco in Newport Beach, warned in October that Greece was likely to default because its debt burden was too large to be remedied solely through reduced government spending.

-- Tom Petruno

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