Greek Government Five-Year Bonds Tumble in First Day of Trading

By Abigail Moses and Caroline Hyde Jan. 27 (Bloomberg) -- Greece’s new 8 billion euros ($11 billion) of five-year bonds tumbled in the first day of trading, pushing the cost of insuring the government’s debt from default to a record. The spread on the notes, due August 2015, widened as much as 35 basis points to 385 over the benchmark mid-swap rate, according to Markit Group Ltd. iBoxx prices on Bloomberg. Credit-default swaps protecting against losses on Greece for five years soared 48 basis points to 373, according to CMA DataVision. “Technically, the term is that it’s getting smacked,” said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London. “Clearly what’s happening is very negative and could lead to a vicious circle.” Spyros Papanicolaou, head of the Greek debt agency, said yesterday he expected the spread on the bonds to tighten because the country has been “misjudged.” The European Commission said today that Greece hasn’t done enough to rein in its deficit that reached 12.7 percent of gross domestic product in 2009. One-year credit-default swaps on Greek debt jumped 43 basis points to 481, CMA prices show. They rose above the cost of five-year swaps for the first time Jan. 13, inverting the so- called yield curve and signaling investors perceive an increased risk of default. “Unless this bond stabilizes and general debt stabilizes, you have to ask the question: Who’s going to lend money to them next time and at what price?” Jenkins said. Order Book Greece received 25 billion euros in orders for the bonds, after offering 0.3 percentage-point more yield than on the nation’s existing debt with similar maturities. The government sold almost 75 percent of the bonds to international investors, Papanicolaou said. U.K. investors bought more than 29 percent of the notes sold via banks, according to Papanicolaou. French investors purchased almost 8 percent and domestic buyers acquired more than 26 percent. “This may be the biggest order book ever achieved for a single tranche deal,” said Daniel Shane, head of sovereign, supranational and agency syndication in London at Morgan Stanley, one of the managers on the deal. “The importance of Greece’s transaction cannot be overstated, not only for the issuer, but also for other European sovereigns and the credit markets in general.” Ratings Downgrade Greece, which had its credit rankings cut by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings last month, needs to raise 53 billion euros this year. The government gave plans to the European Commission on Jan. 15. designed to reduce the shortfall to within the EU’s 3 percent limit. Concern that Greece will struggle fund its deficit spread to other countries, with default swaps on Spain rising 17 basis points to 127, Portugal climbing 18.5 to 149 and Italy up 10 basis points at 114, CMA prices show. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments from Germany to Greece rose 9.25 basis points to a record 87.25, according to London-based CMA. That means it costs $87,250 a year to insure against losses on $10 million of debt for five years. The yield on the Greek 10-year bond rose 44 basis points to 6.68 percent as of 4:35 p.m. in Athens, with the difference in yield, or spread, against German bunds increasing by 46 basis points to 350 basis points, the widest since December 1998. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. An increase signals deterioration in perceptions of credit quality. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. To contact the reporter on this story: Abigail Moses in London at amoses5@bloomberg.net