August 19, 2022

Bond Yields Rise in Europe Despite French Assurances

 Even German government bonds fell, and yields rose. Investors calculated that if the French proposal to roll over existing debt into new loans came to pass, somebody was going to pay for it. That would be the richer countries at the center of the euro currency zone, namely Germany and France.

 Normally, the bank plan announced by President Nicolas Sarkozy for French banks to extend the maturity of a large part of the Greek government debt they own by 30 years would have lifted bond prices in Greece and around Europe. It should have fueled optimism that Greece could escape its debt crisis and that other nations might soon find a similar way out of their own financial problems.

 But the vote in Greece on Wednesday and Thursday seemed to loom larger in investors’ minds as some doubts rose that the Greek government would pass new austerity measures. Yields on government bonds in Greece and other highly indebted nations like Ireland, Portugal and even Spain and Italy rose despite the announcement that the rollover plan was being considered.  

 Traders said investors feared that there was still some nervousness that the vote on 28 billion euros in spending cuts and tax increases could fail in Greece’s Parliament if the Socialist government cannot muster its majority. If the austerity measures failed in Parliament, it would stall a new 12 billion euros in aid due for Greece from the European Union and the International Monetary Fund, plunge Europe into a deeper crisis — and make any deal to roll over Greek debt held by French banks moot.

 In addition, traders and economists said there were still unanswered questions about the French proposal and they questioned whether it would form a template for the rollover of other countries’ debt, even whether it could in fact be agreed upon.

 “We have heard so much on this that it needs to be agreed to be taken seriously,” said Laurent Bilke , a strategist at Nomura Securities in London. “At the best it is a proposal from the French banks and the French government.”

 The plan foresees some of the banks’ debt holdings being invested in a guaranteed fund — but Mr. Bilke said it was still unclear who would guarantee the fund. In addition, he said, it was still also unclear when debt would become eligible for the rollover.

Another question hanging over the plan, analysts said, was whether the proposal would not be considered a default by rating agencies.

 Italian and Spanish bond yields recovered somewhat later in the trading session as some optimism returned that the austerity measures would pass in Greece. The yield on Italian debt, in particular, has come under pressure after Moody’s Investor Services last week placed more than a dozen Italian banks on review for downgrade because of the Italian government debt they hold.

 German government bond yields rose, traders said, on the growing realization that if the debt rollover took place it would still involve some kind of debt easing for Greece — and somebody would have to pay for that.

“Even if you are constantly pushing it out into the future, at some stage there has to be a fiscal transfer,” said Steven Major, global head of fixed income research at HSCB in London. 

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