Bondholders sanguine about Greece

London

AS Greece heads towards 11th-hour funding talks with its euro-area membership on the line, bondholders are surprisingly sanguine about its failure so far to secure a deal.

Forget the strategists at Commerzbank AG who say there's a 50 per cent chance it'll leave the currency bloc, and those at Barclays plc who put the exit risk higher even than in the 2012 debt crisis. The Bloomberg Greece Sovereign Bond Index shows those with money at stake aren't seeing a significant increase in the chances of a eurozone departure.

The index, a market-value weighted measure of Greece's bonds, was at 90.89 at Thursday's close. That's 24 per cent above its five-year average. And it's more than five times higher than the 17.2 level reached in 2012 as a slump in Greek securities pushed the nation to accept an international bailout and implement the biggest debt reorganisation in history.

"Things are much calmer this time," said Allan von Mehren, chief analyst at Danske Bank in Copenhagen. "If you go back to 2012, there was a big fear the whole system would collapse. Most people do expect a solution."

That's been the view of bulls including Pacific Investment Management Co and hedge fund Greylock Capital Management, which said they still saw value in Greek bonds after the election in January of the anti-austerity Syriza party. The show of faith contrasts with movements in debt markets earlier this decade that toppled governments, pushed countries to accept financial bailouts and took the region to the brink of breakup.

"Comparing the spreads and movement now with 2012, it's a totally different market," said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. In 2012, "the risk of a default was priced in. If you look at the yield levels we are currently seeing, markets seem to be less tense".

Whether that remains the case may depend on how negotiations progress at a meeting of finance ministers in Brussels on Friday.

Following Syriza's election, Greece and its euro-area peers are at odds over the formula needed to extend the country's 240 billion euro (S$369.8 billion) rescue beyond its end-of-February expiry. With the Greek state and its banks shut out of financial markets, it's dependent on emergency aid to stay afloat.

The Greek government wants to dial back on some austerity measures required in exchange for the funding, and submitted its proposal on Thursday. While Germany, the biggest country contributor to the rescue and chief advocate of economic reforms, rebuffed the proposal, it left the door open to an agreement at Friday's talks.

As lawmakers' shifting positions emerged through the day on Thursday, Greece's 10-year bonds rose and held onto their gains, pushing the 10-year yield eight basis points lower to 9.92 per cent.

"Greece has been played out much more in the media than in the markets," Kerry Craig, a London- based global market strategist at JPMorgan Asset Management, which oversees US$1.7 trillion, said in a Feb 19 interview on Bloomberg Television. "Largely what we're seeing is that we've been through this before; markets know what's going to happen with Greece. Eventually we will get to that resolution." Bloomberg

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