Greek bonds recover as EU weighs in

BRUSSELS Fri Dec 11, 2009 11:03pm GMT

1 of 2. Greek Prime Minister George Papandreou (L) is welcomed by Sweden's Prime Minister Fredrik Reinfeldt, whose country currently holds the EU rotating presidency, at the start of a two-day EU Heads of States summit at the EU council headquarters in Brussels December 10, 2009.

Credit: Reuters/Sebastien Pirlet

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BRUSSELS (Reuters) - Pressure on Greek bond markets eased on Friday, helped by support from policymakers across Europe, but banking stocks slid another 6 percent as government pledges on policy failed to soothe worries over its finances.

Greek bonds, stocks and credit default swaps have all taken a beating in the past weeks over rising concerns about the highly indebted country's fiscal deterioration, with pressure further increasing after Fitch cut its rating on Greece Tuesday.

Greece's 10-year government bond yield spread over benchmark German bunds contracted by 23 basis points to 213 basis points. But Greek bank stocks closed down 5.2 percent with traders citing disappointment with lack of specific announcements by the Greek Prime Minister at a press conference.

"The comments from euro zone officials do help to calm markets down," said Diego Iscaro, at IHS Global Insight. "(But) I wouldn't be surprised if spreads start to widen again if there aren't concrete measures or if investors' sentiment deteriorates further."

Policymakers lined up at an EU summit in Brussels on Friday to say Greece will not go bankrupt and they trusted it to take the tough fiscal consolidation measures required to get its public finances in order.

"The Greek authorities will take effective action. I am fully convinced Greece will return to the consolidation path. This is dramatically necessary," Eurogroup chairman Jean-Claude Juncker told a news conference.

French President Nicolas Sarkozy said Greek Prime Minister George Papandreou had reassured its EU counterparts at the summit. French Economy Minister Christine Lagarde said Greece could rely on its euro zone partners but needed to tidy up its public finances, following similar comments by German Chancellor Angela Merkel on Thursday.

"NOT LOOKING FOR A BAILOUT"

The cost of protecting Greek government debt against default fell on Friday as concerns about Greece's fiscal situation eased after the European official's statements.

Five-year credit default swaps (CDS) on Greek government debt fell to 199 vs 216 at New York close Thursday, according to CMA Datavision.

Greek Prime Minister George Papandreou told Reuters on Friday that Greece will meet its debt obligations and plans to reduce its budget deficit to below 3 percent of GDP in four years, sending bond yields lower.

"We are cutting the deficit with systemic changes and we are planning to do this within four years. It is a very clear programme and we are absolutely determined to do so," Papandreou said in an interview on the sidelines of a European summit.

"We are not looking for a bailout," he said.

Greece has faced rising borrowing costs and harsh criticism over its credibility since the new Socialist government, which came to power in October, revealed the deficit was twice as big as previously forecast, reaching 12.7 percent of GDP this year.

Papandreou will outline fresh plans to cut the country's ballooning deficit after meeting employers and labour unions next week, a Greek official told Reuters on Friday.

But Greek bank stocks .FTATBNK closed down 5.22 percent on Friday, wiping out a 5.0 percent gain the previous day, and dragging the whole Greek market down 2.4 percent.

"Fears for a possible downgrade by Moody's ... as well as the Prime Minister's vague comments in Brussels about addressing economic problems significantly worsened the mood," said Constantinos Vergos, head analyst at Cyclos Securities.

EU partners and rating agencies have been pressing Greece for weeks to come up with specific measures to cut its deficit and debt, due to become the euro zone's biggest in term of GDP next year.

German Finance Minister Wolfgang Schaeuble insisted Greece should not be given the impression that it did not need to solve its own budget problems, while saying there was no lack of EU solidarity on Greece.

Analysts from Moody's rating agency will be in Athens on Monday for an inspection visit, Greek government officials told Reuters. Papandreou said on Friday it was unnacceptable for countries to be "at the mercy" of rating agencies.

(Writing by Ingrid Melander; Additional reporting by Lefteris Papadimas, Harry Papachristou, Dina Kyriakidou in Athens and Tamawa Desai and George Matlock in London; Editing by toby Chopra)

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