LONDON: Yields on lower-rated euro zone bonds slid on Thursday after Greece asked its EU lenders for a six-month loan extension and pledged to honour all its debts, even though Germany immediately rejected its proposal.
In a document seen by Reuters, Greece appeared to have moved substantially toward the position taken by euro zone finance ministers in negotiations on Monday that ended without a deal as Athens vowed to ditch the 240-billion euro bailout programme.
The German finance ministry, however, said the Greek proposal was not a substantial solution and did not correspond to criteria which euro zone finance ministers agreed on Monday.
Euro zone finance ministers will meet on Friday afternoon in Brussels to consider the request, the chairman of their Eurogroup, Jeroen Dijsselbloem, said in a tweet, lifting market expectations of a breakthrough despite the German stance.
"This is the compromise that everyone had hoped will come out of this. It seems on the Greek side, their demands are not unreasonable ... and we should now get a definitive agreement soon," said Lyn Graham-Taylor, a rates strategist at Rabobank.
Greek three-year yields were down 60 basis points at at 17.11 percent, having fallen more than a percentage point earlier, and 10-year yields were 22 bps lower at 10.2 percent.
The yields retreated further from highs above 22 percent and 11 percent respectively, hit last week as the standoff between Greece's anti-austerity government and its EU/IMF lenders over a new debt deal rattled investors.
Optimism about an agreement saw lower-rated debt outperform German bonds. Italian, Spanish and Portuguese 10-year yields initially fell by as much as 10 bps before bouncing off the day's lows. They were trading 5-7 bps down at 1.60 , 1.55 percent and 2.27 percent respectively.
HIGH STAKES
The stakes over reaching an agreement with its European partners are high for Greece, which is rapidly burning through its cash reserves and risks being forced out of the currency bloc.
The European Central Bank is also putting pressure on Athens and on Wednesday approved a smaller increase in emergency funding to Greek banks than requested.
The ECB raised the provision on Emergency Liquidity Assistance (ELA) by 3.3 billion euros, bringing the total to 68.3 billion euros, a person familiar with the ECB talks said.
The Greek central bank had requested an extension of roughly 10 billion euros, said the source. Other sources said it had sought an increase of 5 billion.
"Over the next few weeks, Greece will, therefore, need to achieve substantial progress on fleshing out the exact parameters of the programme as well as voting legislation through parliament," Deutsche Bank strategists said in a note.
"For this to materialize, agreement needs to be reached at tomorrow's Eurogroup, with another breakdown again bringing ECB liquidity provision back into immediate question."
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