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Riots push bond spreads wider
Civil strife, budgetary problems make investors uneasy; end to trouble seen having positive impact

Civil strife, political risk and fiscal woes are the main drivers for a sharp increase in the yield on Greek government bonds to their widest in nearly a decade versus eurozone benchmark German Bunds yesterday.

Greek spreads also widened against other peripheral sovereign debt such as Italy’s BTPs, which would appear to indicate that Greek bonds are at least partly under pressure from internal problems.

The 10-year debt yields ballooned to 190 basis points over Bunds, compared with an already-lofty 172 bps on Wednesday, as rioting and fears that the one-seat majority government could collapse had upset investors, said experts.

“As we have highlighted over the past months, the political situation in Greece was already very tense given New Democracy’s one-seat majority and their need to tighten their fiscal policy, and on Wednesday we finally began to see some clear Greek underperformance versus Italy,” said David Keeble, head of fixed income strategy at Calyon in London.

“With the 10-year BTP-Bund yield spread having stabilized around 129 bps, events should illustrate just how frightened investors have become, as Greece would normally tighten in a little from here,” he added.

Analysts see Greek spreads widening to 200 bps by early next week and remaining at that level into 2009.

“The 200 bps threshold – I’m very confident that we’ll see that level in the next days,” said David Schnautz, a bond analyst at Commerzbank in Frankfurt.

A growing threat of Greece missing its fiscal goals as the slowing economy drags tax revenues lower is also putting pressure on spreads.

Deputy Economy and Finance Minister Nikolaos Legas told Parliament on Wednesday the budget deficit in September hit 11.63 billion euros, overshooting the 10.83-billion-euro target for the year, as specified in the 2009 draft budget. (Kathimerini, Reuters)

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