LONDON (Reuters) - Greek financial markets sank further on Monday after Prime Minister Alexis Tsipras made a speech showing little intention of sticking to the terms of the international bailout keeping Greece afloat.
Other European markets also felt some limited selling pressure due to concerns about Greece, which had its credit rating cut by Standard & Poor’s on Friday.
An index of Greek banking stocks fell almost 10 percent close to record lows, pushing the Athens bourse’s main index nearly to the lowest levels since the country’s 2012 debt restructuring. Government bond yields <0#GRTSY=TWEB> rose by up to 3.7 percentage points, with three year yields nearing 22 percent.
Having returned home empty-handed from a week-long European tour in search for allies, Tsipras laid out a list of measures to reverse the austerity imposed by the European Union and the International Monetary Fund and vowed not to extend the current bailout deal.
Finance Minister Yanis Varoufakis kept up the rhetoric, calling the impact of the bailout “toxic”.
“The possibility of Greece leaving the euro zone has increased with this speech from 35 percent to 50 percent,” said Gary Jenkins, chief credit strategist at LNG Capital.
Varoufakis warned that the euro would collapse if Greece were to leave the shared currency.
There was little sign that EU capitals were willing to accept a reversal of Greek austerity measures or to extend loans that would buy time to negotiate with Athens. The market pressure on them to ease their stance was also limited.
Spanish, Italian and Portuguese 10-year bond yields were up 8-12 bps on the day, with the fact that the European Central Bank will start buying government bonds next month tempering contagion from Greece.
Other defense mechanisms, such as the European Stability Mechanism bailout fund, were helping to insulate the rest of Europe for now.
“Part of the problem is both sides feel emboldened. Greece is in a better economic situation than it was before ... and the government has a strong mandate from the people to change,” said Ilan Solot, a strategist at Brown Brothers Harriman.
“But the EU is emboldened too because there are a lot more backstops than before ... and you can see the contagion is so much smaller. If both sides feel more emboldened it makes it more difficult to negotiate.”
It was not just financial markets pressuring Greece to stick to the commitments attached to the 240 billion euros worth of EU/IMF loans. The ECB said it would stop accepting Greek debt in return for funding from Wednesday, forcing local banks to seek more expensive emergency lending from the Greek central bank.
On Friday, Standard & Poor’s cut Greece’s sovereign debt rating to B- from B, warning that liquidity restraints on local banks would limit the time the new government has to clinch a deal with its creditors. Moody’s placed its Caa1 rating on review for downgrade.
Piraeus Bank was down 14 percent, Eurobank fell 9.6 percent and the National Bank of Greece dropped 10 percent.
Greek three-year government bond yields shot up 377 basis points to 21.74 percent, the highest level since the bonds were issued last July and widening their gap above 10-year yields which rose 88 bps to 11.33 percent. Such a ballooning of short-term borrowing costs over longer-dated equivalents reflect investors’ rising concern that the standoff between Greece and its creditors could push the country back into default.
“There is a widespread concern about the outcome of this collision the Greek government is heading to with Europe,” said Beta Securities trader Takis Zamanis. “Both sides seem not to move from their positions and this increases the risk”.
Yields on top-rated German 10-year Bunds, which set the standard for euro zone borrowing costs, fell as much as 4 basis points to 0.34 percent.
RBS rate strategist Marco Brancolini said there was a 40 percent chance that Bund yields could turn negative this year as investors seek shelter from the Greek market fallout.
“Turbulence from Greece helps Bunds to perform and accelerates the fall in yields towards zero,” he said.
Additional reporting by Emelia Sithole-Matarise and John Geddie in London and Angeliki Koutandou in Athens; Editing by Anna Willard and Sonya Hepinstall