By Jack Duffy

PARIS (MNI) – Yields on one-year Greek government debt hit 115% on
Monday and two-year notes yielded 70%, on concerns that Athens was
moving ever closer to a default on its debt.

Although the government of Prime Minister George Papandreou
announced additional measures on Sunday to plug Greece’s deficit gap,
the moves failed to reassure investors, who have grown increasingly
doubtful that the second Greek bailout package will succeed in rescuing
the country.

“The market is pricing in the worst-cast scenario,” said Giuseppe
Maraffino, an analyst at Barclays Capital in London. In addition to
economic factors, Maraffino said there is “increasing political
uncertainty about how to manage the crisis.”

In Germany, comments by the Economy Minister Philipp Roesler that
an “orderly insolvency” for Greece was no longer taboo, and reports that
Germany was making plans to protect its banks in the event of a default,
created the impression that what remained of the Eurozone’s solidarity
with Greece was eroding fast, analysts said.

“The environment is deteriorating further,” said Chiara Cremonesi,
a fixed-income analyst at UniCredit in London. Cremonesi said investors
were concerned that the rescue effort for Greece was built on “economic
assumptions that no longer work.”

She noted that Greece will be unable to meet its deficit targets
this year or deliver on its commitments for privatizations. That has
endangered the next E8 billion tranche of official aid from the European
Commission, the International Monetary Fund and the European Central
Bank.

Cremonesi said that without the aid tranche, Greece could run out
of funds to pay public-sector salaries by the end of October.

Greek 10-year bond yields climbed by more than three percentage
points to 23.5%, pushing other peripheral market yields higher as well.
Yields on 10-year Italian government bonds rose 15 basis points to
5.55%, while Spanish 10-year debt climbed 16 basis points to yield
5.32%.

The higher yields came despite increasingly active buying of
peripheral debt by the European Central Bank.

The ECB said on Monday that it had settled E13.96 billion in
secondary-market bond purchases last week, up from the E13.3 billion a
week earlier. Since resuming the bond purchases in early August, the ECB
has purchased more than E70 billion in debt, nearly matching the total
it had bought in the preceding 15 months.

The escalating crisis continued to weigh heavily on European banks.
Amid fears of a downgrade from Moody’s Investors Service, French bank
shares plunged, despite reassurances from Bank of France Governor
Christian Noyer that they could weather any Greek crisis. Among the top
three banks, Societe Generale fell 12.7%, Credit Agricole dropped 10.5%
and BNP Paribas lost 11.6%.

–Paris newsroom +331 4271 5540; email: jduffy@marketnews.com

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