Rumours about the Greek debt

Greece is again being talked about in the markets, after several weeks of respite. In fact, since last Wednesday, the yield on Greek 10-year bonds has increased to above 10%: the Germany-Greece spread reached 788 basis points that afternoon, or nearly double the rate of a month and a half ago. One of the reasons for rates going up again like this is the growing fear of investors that the country will restructure its debt in the next few months.

As early as the end of May, Bill Gross, one of the principal managers of the bond fund Pimco, said that a rescheduling of Greek debt was inevitable. Those comments were repeated a few weeks later by the Russian finance minister, who admitted that a restructuring of Greek debt would be better than the country defaulting and that it would even receive a good reception from the markets.

However, investors' fears appear to be premature considering the Greek republic's refinancing programme. According to our information, Greece must, on average, repay 30 billion euros per year between now and the end of 2012, namely about 90 billion euros, which is a lower amount than the 110 billion that Europe and the IMF have promised to lend Greece over three years.

On the face of it, Greece will not have to go to the markets before the end of 2013. The issue of refinancing will probably arise after that date: the country will have to repay an additional 70 billion euros between now and the end of 2015, and there is no reason to suppose that Europe will inject money into the country.

But in the immediate future, restructuring does not appear to be very likely, and it could simply frighten the markets and undermine the credibility of the rescue plan and the eurozone as a whole.

This is particularly the case since, for the moment, the figures published by the country are reassuring. Last Thursday, the Prime Minister Georges Papandreou reaffirmed that the budgetary targets set by the EU would be achieved, or even exceeded, in 2010. Greece must reduce its deficit from 13.6% of GDP in 2009 to 8.1%, and it says that it reduced it by 40% in the first five months of the year.

The rise in Greek rates, which is partly due to the rumours about the rescheduling of the debt, can particularly be explained on technical grounds: having been given "junk bond" status by the three main credit-rating agencies, Greek bonds will be taken out of the majority of bond indices. According to Christian Jacq, a strategist at BNP Paribas, this causes owners of portfolios to get rid of Greek bonds. Finally, the Fed's statements last week about the fragility of the eurozone have also had a negative impact on Greek bonds since last Wednesday. The most fragile debts are always the first affected as soon as concerns re-emerge about the finances of the eurozone.