A secretive meeting on Friday of top euro zone finance ministers was enough to remind investors about recent talk of a potential Greek debt restructuring, outweighing its decision that a new plan to adjust the Greek aid programme was needed.
A meeting of euro zone finance ministers on May 16 will shed more light on the discussion and pressure is likely to build on Greek, Portuguese and Irish paper before it as markets grow increasingly anxious for a resolution to the crisis.
‘For now, investors tend to underweigh the positive aspects and focus on the restructuring story,’ said Michael Leister, strategist at WestLB.
‘The (May 16) meeting is absolutely key. It's not going to be the last chance, but the pressure is increasing and things tend to be getting worse and worse. Until then, volatility will remain high and investors are likely to jump on any kind of news and rumours. More clarity is needed.’
Expectations for the meeting's outcome were low, however, with investors seeing little more than a possible reduction in interest rates on loans to Greece and Ireland.
‘It is not certain whether there are going to be any firm conclusions with regards to Greece so it may be that markets will remain in a state of uncertainty until the end of June,’ said Investec chief economist Philip Shaw, pointing to the next International Monetary Fund assessment of Greece's economic situation.
‘Markets are sceptical and even if the Eurogroup decides on a more generous set of terms, the Greek debt situation remains unsustainable.’
Greek five-year bond yields were last 50 basis points up on the day at 22 percent, two-year yields were up 38 bps at 26.17 percent, while CDS rose 43 bps to 1,360 bps.
Portuguese 5-year bond yields were up 27 bps at 11.98 percent, while Irish yields were up to 10 bps higher.
PRESSURE TO ACT
Despite the low expectations, investors were thirsty for more action, with risks that the crisis spreads towards the bloc's larger economies still on the cards.
German Chancellor Angela Merkel's planned meeting with European Commission President Jose Manuel Barroso and the European Council President Herman van Rompuy on Wednesday was perhaps a sign more measures were in the pipeline.
Analysts say a new financing deal for Greece was likely, but its chances to permanently halt the weakening of Greek bonds were slim.
‘The EU is not so much trying to bail out Greece as bail out itself with Spain remaining the line in the sand that must not be crossed,’ said Gary Jenkins, head of fixed income research at Evolutions Securities.
‘It is going to be a challenge for the EU/IMF to claim that Greece's debt is on a sustainable path and although they could just continue to lend to Greece forever the most likely outcome remains a restructuring of Greek debt.’
Spanish and Italian bonds were stable on Wednesday.
Volumes remained at extremely low levels, with bid/ask spreads for Greek, Irish and Portuguese bonds around 300 bps, compared with less than 100 bps at the start of the year, when sentiment on the periphery was considerably better.
In core Europe, Bund futures were 41 ticks higher on the day at 123.85, benefiting from a flight-to-safety bid caused by the periphery issues. The 10-year benchmark Bund yield was last 1.8 bps down on the day at 3.162 percent. Last week's selloff in commodities helped ease concerns about inflation and it was still supportive for Bunds despite a stabilisation on Monday, traderAFP
Room for more gains was limited, however, as European Central Bank officials are seen holding to their hawkish monetary policy stance despite market pressure on the periphery.