Bloomberg News

Greek Two-Year Notes Surge Most in 14 Months on Bailout Accord

July 22, 2011

July 22 (Bloomberg) -- Greek two-year notes soared the most in 14 months after European leaders agreed on a second bailout for the nation in a bid to end the region’s debt crisis.

Irish two-year note yields fell below 15 percent for the first time since July 6. Europe’s leaders announced 159 billion euros ($229 billion) in new aid for Greece following eight hours of talks yesterday. German bunds reversed their losses and bonds from Spain and Italy erased their gains on speculation contagion risks will linger as Fitch Ratings said the debt deal will still result in a “restricted default” rating for Greece.

“The initial response to the plan has been positive, but there are some limitations,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “It’s very focused on Greece. The market is still worried about whether Italy and Spain will be the next casualties. They are very large economies and you’d need a lot more money.”

Yields on Greek two-year notes sank 617 basis points, or 6.17 percentage points, to 27.64 percent at 4:50 p.m. in London, set to end the day with the biggest drop since May 2010. Equivalent Irish yields fell 401 basis points to 15.11 percent.

Greece led a decline in the cost of insuring against a default on European government bonds, with swaps on the Mediterranean nation plunging 500 basis points to a five-week low of 1,660, dropping the most on record. The Markit iTraxx SovX Western Europe Index of default swaps tied to 15 governments sank 20 basis points to 243.

Spain Reversal

Greek 10-year yields dropped below 15 percent for the first time since April 26, sinking 180 basis points to 14.68 percent. Irish 10-year yields tumbled 46 basis points to 11.89 percent.

Spanish 10-year yields rose three basis points to 5.76 percent, after earlier falling 16 basis points to 5.57 percent. Yields on Italian 10-year debt increased six basis points to 5.41 percent, after earlier sliding 18 basis points to 5.16 percent.

Ten-year bund yields fell five basis points to 2.83 percent after reaching 2.95 percent, the highest since July 8. German two-year yields dropped five basis points to 1.37 percent, after touching 1.50 percent, also the highest level since July 8.

Weeks of discord on how to solve Greece’s debt woes drove yields on Spanish and Italian bonds to record highs this month as turmoil threatened to spread across the 17-member bloc.

The agreement opened the door to a potential default through the involvement of private investors through a debt exchange. Greek two-year note yields surpassed 40 percent this week for the first time as European leaders bickered over whether to force private creditors to contribute.

Rescue Package

“It seems people still don’t understand how the package, especially the private-sector involvement, is going to work,” said Peter Schaffrik, head of European rates strategy at RBC Capital Markets in London. “There’s still a lot of uncertainty. Bunds will remain supported by safety bids.”

The rescue package agreed upon last night will consist of 109 billion euros from the euro region and the International Monetary Fund. Financial institutions will contribute 50 billion euros after agreeing to a series of bond exchanges and buybacks that will also cut Greece’s debt load.

European leaders also broadened the scope of the 440- billion euro rescue facility to allow it to buy the debt of distressed euro-member nations in the secondary market. The fund can also aid banks and offer credit lines to repel speculators.

European Central Bank President Jean-Claude Trichet said the bank may be able to accept Greek bonds as collateral in the event of a default because euro countries have agreed to provide guarantees. Heads of governments said they will back Greek bonds up to the value of 35 billion euros in refinancing operations in the event that the country is judged in default on its loans.

German government bonds have returned 1 percent this year, compared with 3.2 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds have lost 18 percent, while Portuguese securities have decreased more than 25 percent.

--With assistance from Abigail Moses in London. Editors: Keith Campbell, Peter Branton.

To contact the reporters on this story: Garth Theunissen in London; Anchalee Worrachate in London at

To contact the editor responsible for this story: Daniel Tilles at

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