Greece meets debt repayment prompting sovereign interest rate slide in eurozone

Yields on three-year Greek sovereign debt slipped by more than 50 bps to 20% after Athens announcement

Christine Lagarde, managing director of the IMF, urged governments to take urgent action to head off a “new mediocre” era of economic growth
Christine Lagarde, managing director of the IMF, urged governments to take urgent action to head off a “new mediocre” era of economic growth

Sovereign bond yields slid sharply across the eurozone as Greece managed to make a key repayment to the International Monetary Fund and the effects of the European Central Bank’s €1 trillion quantitative easing money continued to filter through to debt markets.

Yields on three-year Greek sovereign debt slipped by more than 50 basis points to 20 per cent after Athens announced it had scrambled enough cash together to make a €450m (£325m) payment to the IMF, easing the threat of a default by Athens. Sentiment was also boosted by reports that the ECB has raised the cap on the emergency liquidity assistance available to the Greek central bank.

However, German 10-year bonds yields also continued to sink – to a record low of just 0.14 per cent. Traders pointed to the ECB’s bond-buying programme as the driving force behind the slump in Germany’s de facto borrowing costs, and there was speculation that the benchmark yield will hit zero in the coming month. The yield on the country’s eight-year bonds fell below zero in trading for the first time on record.

Last month, the ECB snapped up €52.5bn worth of eurozone sovereign bonds as part of its battle to push inflation back into positive territory. €11.1bn of this was accounted for by German government bonds, and €8.75bn and €7.6bn in French and Italian bonds respectively.

Other eurozone states have also seen their bond yields severely compressed this year, with the 10-year French benchmark yielding just 0.44 per cent and the Spanish equivalent 1.23 per cent.

And in a reflection of the market’s still massive appetite for safe assets, the Swiss Government this week became the first administration in history to sell a 10-year bond at a negative yield – meaning investors are in effect paying the Swiss Government for the privilege of lending to it.

Dwindling sovereign bond yields across the eurozone as well as much of the developed world have prompted fears of a “secular stagnation” of low interest rates and feeble growth. In a speech in Washington, Christine Lagarde, managing director of the IMF, urged governments to take urgent action to head off a “new mediocre” era of economic growth.

Greek Finance Minister Yanis Varoufakis

“It is not that overall growth is bad. It is rather that, given the lingering impact of the Great recession on people... growth is just not good enough,” she said.

Greece is due to pay a further €800m to the IMF on 12 May but is fast running out of cash. Its eurozone creditors are still refusing to release a €7.2bn tranche of bailout aid. They have instructed Athens to come up with a package of domestic economic reform proposals by 24 April.

Athens submitted a 26-page list of planned reforms last week but eurozone officials said they lacked key details.

“The negotiations are proceeding quite well,” said the Greek finance minister Yanis Varoufakis in an interview. “It is in our mutual interest to strike a deal by the 24th and I’m sure we will.”

According to Bloomberg, the ECB’s governing council raised its cap on the emergency liquidity assistance available to the Bank of Greece by €1.2bn to €73.2bn after a Governing Council telephone conference.

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