Skip to main content

Austrian central bank Governor Ewald NowotnyHEINZ-PETER BADER/Reuters



Greek borrowing costs jumped to euro-era highs after a European Central Bank council member said that a short-term "selective default" by Greece might not have "major negative consequences."

The comments by Ewald Nowotny, Austria's central bank governor, sparked a jump in two-year Greek borrowing costs of nearly 5 percentage points to 39.24 per cent at one point, one of the biggest daily leaps since the country joined the single currency.

The Austrian central bank later clarified Mr. Nowotny's remarks, saying he was fully in agreement with the position of Jean-Claude Trichet, ECB president, who has warned that any default by Greece would result in its bonds not being accepted by the ECB as collateral.

This helped the Greek bond market regain some of the losses, with two-year yields easing back to 39.02 per cent, up 4.55 percentage points on the day.

Greek two-year bond yields have risen by about 12 percentage points since the start of July because of uncertainty over a second bailout for the country.

However, it was only short-term Greek maturities that saw big rises. Benchmark 10-year Greek bond yields fell 18 basis points to 18.03 per cent.

The volatility in Greek two-year yields came against a broadly positive day for the euro zone peripheral bond markets as yields in Italy, Spain, Portugal, and Ireland mainly fell as some traders took profit after Monday's selloff.

Greece also sold €1.625-billion ($2.3-billion U.S.) of 13-week bills and saw a bid-to-cover ratio of more than three times at a yield of 4.58 per cent, slightly lower than yield in the June auction of 4.62 per cent. A Spanish auction of bills, however, saw borrowing costs jump sharply.

Spain sold €3.79-billion of 12-month bonds at an average yield of 3.702 per cent, significantly higher than the 2.695 per cent paid last month.

It sold a further €661-million of 18-month debt at an average yield of 3.912 per cent, up from 3.26 per cent in June.

Madrid's borrowing costs have jumped to fresh euro-era highs in the past two weeks against a backdrop of concern among investors about the eventual fate of Greece's sovereign debt and an abrupt change in sentiment towards Italy.

"This is no longer a country-specific issue, it is a euro-area problem," said Javier Díaz Giménez, a professor at IESE business school.

"There is no question that both Spain and Italy are too large to be rescued, and unless there is a major change coming from Brussels it is very hard to see how Spain can return to sustainable growth."

The yield on Spain's benchmark 10-year government bonds eased to 6.08 per cent from highs of 6.32 per cent on Monday, close to levels that in effect closed access to debt markets for Greece, Portugal and Ireland and pushed them towards international rescues.

Interact with The Globe