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Greek Debt Demand May Rebound at Auction on ‘Zero’ Default Risk


April 13 (Bloomberg) — Demand for Greece’s debt may recover as the government sells 1.2 billion euros ($1.6 billion) of Treasury bills in its first offering since winning an aid package from the European Union.

Greece will auction 26- and 52-week bills today as it seeks to fund the EU’s biggest budget deficit. Euro-region finance ministers and the International Monetary Fund offered the country as much as 45 billion euros in loans two days ago. The nation’s bonds jumped yesterday as the lifeline boosted confidence the government will honor its debt payments.

“The rescue package means the default risk over the next 12 months is now close to zero,” said Kornelius Purps, a fixed- income strategist in Munich at UniCredit SpA, one of 22 financial institutions that deal directly with Greece’s debt agency. “This wasn’t the case last week. I can imagine that demand will be closer to the stronger levels we saw last year. I wouldn’t be surprised if Greece raises much more than initially planned.”

Prime Minister George Papandreou needs to raise 11.6 billion euros by the end of May to cover maturing debt, with another 20 billion euros required by year-end to pay interest and finance this year’s deficit. Last week the government estimated its 2009 shortfall to be 12.9 percent of gross domestic product, the biggest in the euro’s history and more than four times the EU’s 3 percent limit. The previous forecast was 12.7 percent.

Demand Slumps

Yields on Greek bonds rose last week as confidence in the nation’s assets withered. The extra yield investors demand to hold the country’s 10-year bonds instead of German bunds, the region’s benchmark government securities, climbed to 442 basis points on April 8, the highest since 1998. The Greek-German spread averaged about 65 basis points, or 0.65 percentage point, in the five years through November, before concern deepened that the nation’s deficit would soar.

Deteriorating sentiment toward Greek debt led to the lowest demand in a year at 26- and 52-week bill sales in January. That’s when the Public Debt Management Agency raised 3.7 billion euros from the auctions, which included a 13-week security.

The 26-week bill drew bids for 4.9 times the amount of securities offered on Jan. 12, compared with an average bid-to- cover of 6.2 times in 2009, according to data compiled by Bloomberg. The ratio at the 52-week sale was 3.1 times, below last year’s average of 5 times, the data showed. Demand for the 13-week bills was also less than the average in 2009.

Rescue Package

The 52-week bills were sold at a yield of 2.2 percent at the January auction, compared with an average of 1.62 percent in the previous four auctions, Bloomberg data showed. The securities yielded 7.48 percent last week.

Euro-region finance ministers said on April 11 they would offer Greece as much as 30 billion euros in three-year loans in 2010 at about 5 percent. Another 15 billion euros would be provided by the IMF.

With the euro facing the stiffest test since its 1999 debut, the 16-nation bloc maneuvered around rules barring the bailout of debt-plagued countries, aiming to prevent Greece’s financial plight from spreading to other members and to mute concerns about the currency’s viability. Germany also abandoned an earlier demand that Greece pay market rates.

The yield on the 10-year Greek bond tumbled 41 basis points to 6.80 percent yesterday as bond prices rose, and the two-year note yield sank 87 basis points to 6.29 percent.

Fitch Downgrade

Concern that Greece’s credit rating remains vulnerable may restrain demand at the bill sale, said Ciaran O’Hagan, a fixed- income strategist in Paris at Societe Generale SA, another primary dealer for Greek debt sales.

Fitch Ratings cut Greece’s debt on April 9 to BBB-, its lowest investment grade, with a “negative” outlook, meaning the company is more likely to cut its classification than leave it unchanged or raise it. Standard & Poor’s and Moody’s Investors Service also have “negative” outlooks on the debt.

“Greece’s new Fitch rating is a negative for this auction, and indeed for all Greek debt holders,” said O’Hagan. “But given the amount is relatively small, it should be well- absorbed. The package is positive for sentiment.”

The EU-IMF rescue package may not translate into lower funding costs at Greek debt sales anytime soon, Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs Group Inc. in London, another primary dealer, wrote yesterday in an e-mailed report.

“We do not think that Greek market-funding terms will decline all the way to the ones now on offer by the support package in light of pending issues on conditionality, availability and drawdown terms,” Garzarelli wrote in an e- mailed note. “Medium-term debt sustainability also remains an area of focus.”