Greek Banks Seek Lifeline, Stocks Sink

Yield on 10-year bond hits 7.13%, stocks fall as Athens says '09 budget shortfall is slightly more than forecast


By ALKMAN GRANITSAS And NICK SKREKAS

Greece's banks, which have seen their borrowing costs soar as a result of the country's fiscal problems, have asked the Greek government to tap an extra 17 billion euros ($22.7 billion) in unused liquidity measures as they struggle amid the country's economic crisis.

The move caused financial stocks in Greece to drop and helped push down the ASE stock index, which fell 3% to 1987.58, its lowest close since March 1.

A banks stocks subindex sank 4.2%. Over the past six months that gauge has fallen about 40%.

Greece's banks are struggling to cope with rising loan-loss provisions and trading losses on their large portfolios of Greek government bonds.

"They want to have an additional safety net now that the economy and the banking system are under pressure," George Papaconstantinou, the finance minister, told reporters after a meeting with Bank of Greece governor George Provopoulos.

EFG Eurobank Ergasias slid 7.5% and Piraeus Bank lost 5.7%.

Greek bonds sank further on Wednesday after the government said the budget deficit in 2009 likely was 12.8% or 12.9% of gross domestic product, compared with an earlier estimate of 12.7%. A government spokeswoman denied a report that the revision could show 2009's deficit was as much as 13.5% of GDP.

Greece's benchmark 10-year bond yielded 7.13%, up from 6.999% late Tuesday. That is the highest closing yield since Oct. 26, 1999, when the country's 10-year debt yielded 7.236%, according to data from Thomson Reuters. The German 10-year bond, considered the euro-zone benchmark, yielded 3.13%, pushing the gap between the two countries to four percentage points. In 1999, the gap was 1.777 percentage points.

The gap was even wider between the two countries' two-year notes: such Greek debt yielded 6.59%, compared with just 0.97% for Germany.

The cost of insuring against the risk of a Greek default rose. Greece's five-year sovereign credit-default swaps rose to 4.1 percentage points, from 3.90 percentage points Tuesday, according to CMA DataVision, meaning it cost €410,000 ($549,600) annually to insure €10 million of debt for five years. It cost €31,600 to insure the same amount of German debt against default.

Markit analyst Gavan Nolan said the Greek credit-default swap briefly reached 4.15 percentage points, making insurance against the risk of default pricier than for Iceland for the first time. Iceland, whose credit-default swaps on Wednesday traded at 3.97 percentage points, in 2008 sought IMF aid after its main banks collapsed.

In late 2008, Greece's previous conservative government had passed a 28 billion euros support package that consisted of a mixture of loan guarantees, direct capital injections and special liquidity measures to boost the Greek banking system.

However, the banks had tapped only about 11 billion euros of those funds, mainly drawing on the special liquidity measures and direct capital injections, by issuing special preference shares to the Greek government.

Although Greek banks are well-capitalized, with an average capital-adequacy ratio of around 12%, they have been squeezed by slower economic growth and rising loss provisions, which reached 7.7% of total loans outstanding last year.

Late last month, Moody's Investors Service downgraded five of the country's nine major banks, citing a weakening in the banks' stand-alone financial strength, as well as the "anticipated additional pressures stemming from the country's challenging economic prospects in the foreseeable future."

Greek credit growth for the past four months has hovered at an anemic 4%, down from a growth rate of more than 20% two years ago. Nonperforming loans, meanwhile, continue to rise and aren't expected to peak until the second half of the year.

Sentiment toward Greece remains poor as the country continues trying to convince investors that it can refinance its borrowings, given its heavy debt load and the latest surge in its bond yields. Greece has large financing needs over the next two months and is expected to issue a bond in coming weeks.
—Katie Martin, Mark Brown and Emese Bartha contributed to this article.