Greek bonds extend losses as EU mulls scrapping troika control

LONDON: Greek bonds extended losses on Tuesday as Brussels considered lighter-touch supervision of the bailed-out country that strategists say is still vulnerable to external shocks and unable to meet its commitments to reform.

Greek bond yields have risen around 20 basis points this week, swiftly reversing initial declines that resulted from a ratings upgrade by Moody's late on Friday.

Market experts have offered a long list of reasons for this underperformance ranging from its financial fragility, inability to push through reforms, banking sector uncertainty and the lack of liquidity in its bonds.

This comes at a time when, European officials say, the EU is weighing up whether to scrap supervision of Athens by its troika of international lenders, allowing it to pursue its own plan to bolster the economy in return for a drip-feed of debt relief.

"Greece is likely to attract increasing attention over the second half of the year," said Timo del Carpio, European economist at RBC.

He cited a weekend article in daily Ekathimerini that said Greece would not be able to complete some 600 pending actions before its next troika review in September.

The first move higher in Greek yields this week came around Monday lunchtime, just after incoming European Commission President Jean-Claude Juncker played down the option of an outright writing-off of part of the euro zone's loans to Greece to make the country's debt more manageable.

Greek 10-year bond yields were 10 basis points higher on Tuesday at 6.27 percent, following a similar move during Monday's session.

Traders said the moves were exacerbated by low volumes with only a couple of hedge funds seen selling Greek bonds.

SKELETONS IN THE CLOSET?

Nick Stamenkovic, a bond strategist at RIA capital markets, said the bailout announced this week of Portugal's largest bank BES raised questions of what other "skeletons lay in the closet" of the euro zone banking system.

Greek banks - already in the process of being recapitalised ahead of a euro wide sector review due to be published in October - could be particularly vulnerable, said Stamenkovic.

Spanish and Italian bonds held steady as investors started to see them as insulated from Portugal's banking travails, helping draw a line under an issue that has shaken vulnerable peripheral debt in recent weeks.

Spanish and Italian 10-year yields initially dropped 2 basis points, to 2.68 and 2.48 percent respectively, in early trading before edging back up to trade flat.

Portugal's 10-year yield was 4 bps higher at 3.69 percent, having been the euro zone's best performer on Monday as markets first reacted to the BES bailout.

UniCredit's Luca Cazzulani reiterated, however, that volumes were very low and with many participants on summer vacation did "not reflect fully the entire community of markets".

Daily volumes in Italian bond futures dropped by almost two thirds over the weekend, according to Reuters data.

In core markets, German bonds edged up 2 bps to 1.14 percent after euro zone economic data that helped take pressure off the European Central Bank to launch new easing measures. The ECB next meets on Thursday.