* Greece wants yields below 5 pct before debt market return
* ECB support would boost chances considerably
* Decisions will depend on outcome of Eurogroup meeting
(Adds detail, background, quotes)
By Lefteris Papadimas and Marc Jones
ATHENS/LONDON, June 7 Greece will return to
markets once its borrowing costs drop below 5 percent, sources
told Reuters, which could happen if the European Central Bank
includes Greek bonds in its 2.3 trillion euro asset purchase
That important caveat depends primarily on whether Athens
can agree a debt deal with the euro zone and International
Monetary Fund next week that is good enough to convince the ECB,
which meets on Thursday, to come on board.
It remains enough of an uncertainty that officials involved
in the talks are reluctant to call the outcome. But bankers have
been quietly sounding out investors for what would be Greece's
first return to markets since 2014.
The response has convinced Athens, which still has a public
debt ratio of 180 percent of gross domestic product and an
economy which is barely growing, to go ahead if the conditions
"A return to the markets with a five-year bond should be
with yields below 5 percent," said a Greek government official
who requested anonymity.
Greece's five-year yield is currently around 5.9 percent,
according to Reuters data.
Bond market investors estimate that could drop by between
0.75 of a percentage point and 1.5 percentage points if the ECB
does start buying Greek debt.
Greece's borrowing costs have fallen in the wake of previous
deals with its international lenders, as shown in this graphic reut.rs/2s3I2mF.
Investors also point to how the yield gap between 10-year
Portuguese and German bonds shrank by 1.4 percentage points as
the ECB prepared to launch its asset purchase programme, which
provided a guaranteed buyer for Portugal's debt.
"We still think you are about 75 basis points away from a
point where you can start to have that dialogue about Greece
returning to the market," said BlueBay Asset Management's Mark
Dowding, whose firm owns Greek debt.
"But I think that (the ECB signalling it would buy Greek
bonds) could certainly be a catalyst that would push yields into
While the ECB would be important as a backstop for investors
who fear things might sour again in Greece, the actual amount of
Greek bonds it could buy at the moment are relatively small.
Greek sources suggest it would be 2-3 billion euros this
year. That is roughly 10 percent of the 28 billion "tradable"
Greek government bond market, according to Societe Generale,
although the bank thinks the ECB may struggle to buy anything
for a while.
The euro zone's central bank cannot buy more than a third of
the bonds issued by any country, and it still holds more than 10
billion euros worth of Greek paper it bought in 2010-2011,
during the early phase of the bloc's debt crisis.
Borrowing longer-term at 5 percent would not be sustainable
for Greece, which currently pays about 1 percent on its European
Stability Mechanism loans and around 3.5 percent on lending from
the International Monetary Fund. But tapping markets at all
would be a sign of progress.
Borrowing cost at that level would also roughly match the
4.95 percent Athens paid in 2014 when it made one of the
fastest-ever returns to debt markets following a default.
The plans could still be delayed, however. ECB Executive
Board member Benoit Coeure told Reuters last month it wanted to
see "a clear description of the debt measures and how much they
would contribute to the sustainability of Greek debt".
ECB chief Mario Draghi will be asked exactly what that means
at a news conference on Thursday, before euro zone finance
ministers and the IMF head to next week's Eurogroup meeting in
Luxembourg with a long list of potential debt relief measures.
They will include delaying loan repayments anywhere from
zero to 25 years and making them cheaper. The catch is that
Germany and others want to wait until August 2018 to deliver
them, to motivate Athens to stay on track with its programme of
If Athens is willing to accept such a plan, it would leave
the ECB with a decision to make.
The debt measures are unlikely to be as straightforward as
it would like, but if euro zone ministers and the IMF have both
given the deal their blessing, refusing to buy Greek assets
could leave it open to accusations of discrimination.
"The fudge needs to be good enough that it gives the cover
for the ECB to start buying Greek bonds again," said BlueBay's
(Additional reporting and graphic by John Geddie in London;
Editing by Tom Heneghan and Catherine Evans)