April 20, 2010 / 1:20 PM / 10 years ago

Greek yields hit 12-year high

ATHENS/FRANKFURT (Reuters) - Greek borrowing costs hit a 12-year high on Tuesday as Athens prepared to launch talks on an EU/IMF bailout package aimed at rescuing Greece from a debt crisis rocking the euro zone.

Greece's Finance Minister George Papaconstantinou speaks during a news conference in Athens April 20, 2010. Greece will decide to trigger an EU/IMF aid mechanism when needed, Papaconstantinou said on Tuesday. REUTERS/Yiorgos Karahalis (

Ten days of talks will begin on Wednesday on the belt-tightening measures Greece must take until 2012, the European Commission said, paving the way for the swift payout of up to 30 billion euros of euro zone emergency aid if Athens asks for it.

Discussions had been due to start on Monday but fell victim to the ash cloud that has closed much of Europe’s airspace, unnerving markets made more jittery on Tuesday by data showing Greece’s unemployment rate had risen sharply and its current account deficit widened.

Finance Minister George Papaconstantinou said Greece would decide whether to trigger the aid mechanism or tap markets depending on borrowing costs and the progress of negotiations.

He said there was “no chance” the country would fail to cover its borrowing needs for May, after it paid a euro lifetime high of 3.65 percent earlier on Tuesday to attract buyers for 1.95 billion euros of 13-week T-bills.

“We now expect Greece to have to tap some form of external aid to get through May... (but) until you actually get that announcement you could see spreads continue to drift,” said Colin Ellis, European economist at Daiwa Capital Markets.

The yield at Tuesday’s T-bill auction more than doubled to 3.65 percent from 1.67 percent at the previous auction of the paper on Jan 19.

At the opposite end of the curve, the premium investors’ demand to buy Greek government bonds rather than euro zone benchmark Bunds also rose to a 12-year high, debt officials said, widening to 492 basis points.

European Central Bank Governing Council member Axel Weber said any Greek default would affect the rest of the euro zone and that aid should be a last resort aimed at financial stability.

“Any possible default by Greece would thus lead with a large probability to a severe economic setback for other countries in the monetary union,” Weber said in a prepared speech.

Earlier he had said Greece might need as much as 80 billion euros (69.96 billion pounds) in the next few years to avoid default, sources at a political event said on Tuesday.

“The markets are considering more and more the prospect that not only will there be a (Greek) support package, but on top of that, debt holders will have to get some restructuring of their bonds,” said Piet Lammens, strategist at KBC in Brussels.

Commenting on Tuesday’s T-bill auction, Jens-Oliver Niklasch, a bond analyst at LBBW, said: “It looks like the T-bill sale was quite successful in terms of them having raised more than they initially planned. But the borrowing cost was quite high. Greece won’t be able to cover its financing needs with T-bills.”

IMF Chief Economist Olivier Blanchard said lending bailout funds to Greece at high interest rates would prevent a rebound.

“Of course, Greece must tighten its belt to pull itself out of the trouble it got itself into,” Blanchard said in an interview in Le Monde newspaper. “But lending it rescue funds at high interest rates doesn’t make sense, because it would make a recovery impossible.”

Another IMF official said he was fully confident Greece was going in the right direction in dealing with its debt.

TROUBLES AHEAD

Germany, set to contribute the biggest chunk of the package, has been reluctant to offer easy help to a chronic fiscal offender, concerned about setting the wrong example for other euro zone periphery members struggling with the economic crisis.

Chancellor Angela Merkel’s Bavarian sister party, the Christian Social Union, said they oppose any plans to rush approval of emergency aid for Greece through parliament by attaching it to another law, one more hurdle for Athens.

An ambitious austerity package designed to cut Greece’s budget deficit by around a third to 8.7 percent of GDP this year was put under further pressure by statistics service data showing unemployment rose to 11.3 percent in January from 10.2 percent in December.

The socialist government has been struggling to keep social peace while imposing tough austerity measures. Unions have protested against salary cuts and tax hikes, staging demonstrations and walkouts. Civil servants go on strike on Thursday.

“Conditions in the labour market are deteriorating sharply,” said Nikos Magginas, economist at National Bank of Greece. “Current trends suggest that the average unemployment rate will exceed 12 percent in 2010.”

The Bank of Greece said the current account deficit widened to 3.52 billion euros in February.

Additional reporting by William James in London; writing by Dina Kyriakidou; editing by Tony Austin

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