Paris: Financial markets sent a strong message on Thursday that they have little faith in a rescue scheme by the European Union (EU) and the International Monetary Fund (IMF) for Greece, driving Greek borrowing costs to record levels and raising questions about a possible default, analysts said.
Greek bond yields jumped to more that 7.5%, the highest readings since the country joined the euro in 2001, the stock exchange in Athens plunged 5.0%.
The tension arises from an increasingly strong view among analysts and fund managers that Greece may be unable to repay huge debts coming due in the coming months despite repeated pledges of help from the EU and IMF.
But analysts are in a quandary over the likely turn of events.
Neil McKinnon, an economist with VTB Capital, said “the end-game for Greece looks like a default,” adding that such was the conclusion of several market analysts.
“The Greek fiscal situation is actually much worse when compared to Argentina’s situation prior to their default in 2001,” he said.
He noted that Argentina’s public deficit then amounted to 6.0% of output in 2001, compared with the current Greek shortfall of 12.7%.
A safety net mechanism, under which the IMF and the EU would provide contingency loans to Greece if insolvency loomed, has failed to reassure investors.
And that is because of a lack of generosity by Greece’s European partners, according to one view.
“The bond market reaction reflects a complete lack of confidence that the Eurogroup/IMF financial assistance package will do any good or indeed whether it constitutes a package at all,” said Nicholas Kounis of Fortis Bank Nederland.
“Financial assistance needs to be made more generous, with loans extended at much lower rates than current market rates,” albeit with strict conditions to ensure that austerity measures announced by Athens are indeed applied, he said.
“It would make sense to make financial aid available as soon as possible. Only a more generous package will restore market confidence.”