Greek yields fall before meeting on debt deal

LONDON: Greek bond yields pushed lower on Friday on hopes euro zone finance ministers will eventually agree a deal on a loan agreement that will help Greece avoid bankruptcy. Greece sought an extension of its current loan agreement on Thursday, but it rejects any deal that would maintain previously agreed austerity measures.

That has put it on a collision course with Germany.

Germany said Greece's proposal was "not a substantial solution" because it did not commit Athens to meet the conditions of its 240 billion-euro international bailout.

However, German European Commission member Guenther Oettinger raised expectations for a breakthrough when he said Greece and its creditors might need another meeting of euro zone leaders next week to reach a deal, after a meeting of finance ministers scheduled for later on Friday.

Investors shrugged off a report by the German news magazine Spiegel that the European Central Bank is preparing for Greece's exit from the euro zone. Greek bonds and stocks remained firm.

"The expectation that there will be an agreement eventually is providing relief to Greece, and it also makes sense to have peripheral markets outperforming as well," said Cyril Regnat, a strategist at Natixis. Greek three-year yields dropped 74 basis points to 16.39 percent, pulling further away from highs above 22 percent struck last week. Ten-year equivalents were 20 bps lower at 10.04 percent.

RESILIENT PERIPHERY

The stakes are high for Greece. It is burning through its cash reserves, and its bailout expires Feb. 28. Over 1 billion euros fled Greek banks in the past two days on fears the country will be forced out of the euro zone. But for many investors, Grexit remains an outside risk.

"It's my own view that it won't happen and that they will find a compromise," said Dickie Hodges, fund manager at Nomura Asset Managers.

"Regardless of what (German Chancellor Angela) Merkel might suggest that they could handle a Grexit from the European currency union, I think it would be exceptionally difficult." Other peripheral euro zone bonds gained as well.

They have largely been insulated from spillover from Greece by the European Central Bank's sovereign bond-buying programme, which starts next month.

Italian and Spanish 10-year yields were 1-2 basis points lower at 1.60 percent and 1.53 percent. Portuguese equivalents were 4 bps down at 2.23 percent.

Focus is also on Spain's credit ratings, with Moody's due to review its Baa2 grade after the European market close. Some analysts expect the agency to upgrade its rating.