LONDON/ATHENS (Reuters) - Greek stocks on Wednesday posted their biggest one-day loss since the height of the euro zone crisis, while bond yields soared to levels that threatened to derail government plans to quit an international bailout a year early.
Ten-year government bond yields jumped to 7.85 percent - levels at which Greece cannot afford to fund its huge debt and the Athens stock market plunged 6.8 percent in its biggest one-day loss since July 2012.
Shares have lost 11.5 percent in the past two days, their biggest fall since October 2008.
“I am cleaning up the blood now,” said Manos Chatzidakis, chief analyst at Beta Securities in Athens, recounting how panic gripped traders in the dealing room as the index briefly fell 10 percent. “The phones were on fire and sell orders piled up.”
Greek Prime Minister Antonis Samaras, speaking after a cabinet meeting, blamed the leftist opposition for stoking renewed turmoil and said Athens would press ahead with plans to wean itself off EU and IMF aid after bank stress tests and the conclusion of debt relief talks.
But there were signs from officials in Brussels that Greece might ask for a temporary credit line after withdrawing from the bailout at the end of this year.
Investors are concerned by the prospect of a snap election in a country that has been at the heart of the euro zone debt crisis since 2010, when the first of its two international bailouts - together worth 240 billion euros - was agreed.
Samaras, a conservative, has sought to bring an early end to the unpopular bailout in the hope it will revive his political fortunes enough to remain in power beyond the first quarter of next year.
But lacking sufficient support for his nominee in a presidential vote in February, he faces the prospect of early elections which recent opinion polls show are likely to be won by the leftist anti-bailout Syriza party.
“The markets for some time now have been saying that Greece is doing very well, with their only concern being political risk,” Samaras said as he also dismissed snap election fears.
“In the last 24 hours, the opposition’s attitude has worsened this risk. It is important that people understand that we are gradually getting out of the crisis and that we should not slide back into the crisis.”
Investors fear that without the constraints of an aid programme, Europe will have less control over government policy and Greece could squander the progress it has made in curbing its budget deficit and ending a six-year-long recession.
Political deadlock could block further reforms, while a shift towards the radical left would bring policy uncertainty - something bond investors dislike.
“Investors are worried that Greece cannot survive alone ... At this level the market is closed for Greece,” said Alessandro Giansanti, senior rate strategist at ING.
Market concern over Greek borrowing costs has grown as they have approached 7 percent, though analysts say it does not necessarily mark the tipping point beyond which the costs of servicing debt would become unsustainable for the country.
Indeed, some analysts argue that Greece’s debt of over 1.7 times economic output would be impossible to roll over even at lower cost. The European Union charges only 1.5 percent interest on its loans and Greece is still expected to initiate talks over some form of debt relief in the near term.
But charts show any rise in yields has historically picked up pace above 7 percent and forced countries such as Ireland, Portugal and Greece itself to seek bailouts. Only the European Central Bank’s promise in 2012 to do “whatever it takes” to save the euro prevented Spain and Italy from having to ask for financial help when their yields topped 7 percent.
“With yields above 7 percent we are back in that very dangerous area again,” Eleni Dendrinou-Louri, professor at Athens University of Economics and Business and a former deputy governor at the Bank of Greece, said in a speech in London.
“I believe that if you can borrow from the market is decided by the spreads that you see every day on the screen.”
As Greek yields soared, German 10-year borrowing costs plunged to record lows as investors fretting about faltering global growth shed risky assets and sought shelter in top-rated government bonds. [GVD/EUR]
As a result the Greek yield premium over the euro zone benchmark reached 710 bps, its widest since January.
Greece sold bonds to private investors earlier this year, making one of the fastest market comebacks by a sovereign that had defaulted, with a sale of five-year bonds that drew strong bids and was considered a great success.
The market turmoil was far from the thoughts of many people on the streets of Athens on Wednesday.
“It doesn’t make a difference to me,” said 25-year-old Dimitra Evangelinou. “I‘m not afraid because I have nothing to lose. I‘m unemployed.”
Additional reporting by Lefteris Papadimas and Renee Maltezou; Editing by Paul Simao