Mark Ostwald, strategist at ADM Investor Services, says the prospect of radical left SYRIZA party taking hold of the Greek government is causing a spike in the country’s bond yield.
The positive outlook of the recent drop in Greek bond yields appears to be overturned this week due to political uncertainty, says CNBC.
Greece’s cost of borrowing has risen sharply this week thanks to a return to political uncertainty and fears that next year’s draft budget will not be approved by the country’s international creditors.
While nowhere near the staggeringly high levels that sent the country to ask for an international bailout in 2010, yields on 10-year sovereign Greek debt hit 6.284% on Wednesday — the highest level since August 13. Yields remained elevated on Thursday at 6.123%. According to Bank of America Merrill Lynch, Greek bonds have gained around 44% over the last year, making them the top performer out of all global equity and bond classes, the CNBC report says.
In addition, spreads on Greek five-year credit default swaps (CDS) continued widening, suggesting a fall in perceptions of the country’s credit worthiness. On Wednesday, spreads widened by 15 basis points, or 3.2%, making Greek CDS one of the day’s weakest sovereign performers, according to Markit.
Investors are concerned that politicians will fail to agree on a new president of the republic to replace Karolos Papoulias in March. This could trigger early elections — a regular occurrence in Greece — and cause the current coalition government to collapse.
In turn, this could jeopardize Greece’s progress in making economic reforms, on which continued assistance from the troika is contingent. Currently, Greece aims to graduate from its loan program in 2016 without further assistance — just as Ireland and Portugal did earlier this year, according to the CNBC report.
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