Mixed signals

Markets observed a major sell-off of Greek sovereign bonds on Tuesday as concerns over the nation's finances flared up again.

The price of seven-year bonds issued only on Monday fell sharply after a new auction of 12-year bonds failed to attract even 40 percent of the buyers needed to meet its one-billion-euro target.

While some observers blame a pre-Easter slowdown, the disappointing response to the latest Greek bond issue dashed much of the cautious optimism analysts had developed after Monday's five-billion-euro ($6.7 billion) bond auction generated offers worth seven billion euros.

The yield on the seven-year bonds, or the interest rate the government offered investors, was originally set at 5.9 percent, but has since climbed to 6.3 percent - the same rate Greece offered on 10-year bonds sold at the beginning of March.

The two latest bond issues were the first to be held since European Union members agreed to a bailout package in which the EU, along with the International Monetary fund, would provide Greece with 22 billion euros ($29.7 billion) in the event it is unable to meet its financial obligations.

Germany in particular had been reluctant to assist Greece, but Berlin softened its stance as it became clear that investors needed some kind of assurance to buy Greek bonds. But now that this safety net is in place, some of the more optimistic analysts say the worst of the Greek crisis may have passed.

"I think this is the beginning of the end," Erik Jones, a professor of European studies at the Johns Hopkins School of Advanced International Studies' Bologna Center, told Deutsche Welle on Tuesday. "The end of the beginning will be in April and May when Greece does their next round of financing."

Worries remain

Despite Monday's positive result, the ground lost on Tuesday shows that worries persist over Greece's ability to pay off its debt, as well as the European Union's will to actually give Greece the money if needed. Writing in Monday's Financial Times, Wolfgang Munchau argued that "it is hard to imagine even a hypothetical scenario in which the European Union would disburse the emergency aid" and called the bailout an "absurd proposition."

Jones said he understands this argument and that the final solution to the crisis might have to be a more coherent fiscal policy governing all EU member states. However, he said that attractive bond yields should continue to attract large institutional investors.

Raffaella Tenconi, chief economist at WOOD & Company in London, said Greece still needs to raise a large amount of money to finance its debts, which could make paying out the bonds down the line difficult.

"They still have about $30-35 billion (22.2 billion – 25.9 billion euros) to go, and the appetite [for Greek bonds] wasn't particularly strong yesterday," she told Deutsche Welle.

Pressure to cut costs in Greece

Despite the large sums Greece still needs to raise, Tenconi said she was confident Athens would make the difficult spending cuts it has promised. The Greek government has pledged to cut 4.8 billion euros ($6.5 billion) from its budget deficit by raising taxes, freezing pensions, and slashing bonus payments to civil servants.

"The market is reassured by what has been announced so far but [traders] want to see action,” Tenconi said.

"We need to see at least six months of these concrete measures being put into place … until the market feels better," she added.

Greek workers' reaction to these cuts has not inspired confidence. Protesters took to the streets a number of times in the past months, marching against the spending cuts and calling for more assistance from fellow EU members, most notably Germany.

Tenconi says she understands that there is “political unhappiness” with some of the economic decisions made by the Greek government. However, she says the protests reflect a small part of the population, and that she believes the social will exists in Greece to make the cuts.

"Enormous fiscal adjustments are possible as long as the changes are explained coherently," she said. "The riots are part of the game, its part of the process."

Author: David Francis
Editor: Sam Edmonds