Debt-stricken Greece returned to capital markets on Monday for the first time since euro zone leaders agreed to give it a financial safety net, but the fuzzy rescue plan did little to reduce its borrowing costs.
The 7-year, 5 billion euro ($6.72 billion) benchmark bond was the first test of market confidence after the 16-nation currency area decided last week on a European-IMF support mechanism as a last resort.
It drew significantly less demand than two previous heavily oversubscribed Greek 10-year issues partly due to the shorter maturity and thin Easter market but also because of expectations that Greek bond yields are not about to fall.
"We are pleased to have had a successful 5 billion euro transaction in a maturity that is not plain vanilla," Greece's debt agency chief, Petros Christodoulou, told Reuters.
The bond looked set to be priced at around 6.0 percent — more than twice what Germany, Europe's biggest economy, pays on 7-year paper.
Analysts said that was in line with what Greece paid on a longer 10-year bond on Mar. 11, while euro zone partners were still wrangling over whether to help Athens at all.
However, the rate might have been still higher if euro zone leaders had failed to reach any decision last week.
"The deal did tighten spreads by a few basis points so there is a quantifiable impact. But in terms of attracting investors I think it will have helped enormously, as it removed a major piece of uncertainty," said Peter Chatwell, a bond analyst at Credit Agricole in London.
Greece needs to cover some 23 billion euros in maturing debt by the end of May, some of which may be met from cash reserves. The premium investors charge for holding Greek bonds rather than German Bunds widened to 318 basis points at one point on Monday.
Officials have said such levels would be "unsustainable" for state finances in the long run.
IMF TACITURN
The head of the International Monetary Fund, which has said little since it was assigned a subordinate role in any rescue, said on Monday there was no immediate sign that Greece would need outside help.
"I hope that the EU strategy for Greece works," Dominique Strauss-Kahn said on a visit to Poland.
"We are ready to help Greece as with any of our members but it is not obvious today that help will be absolutely necessary."
He also said the crisis over Greece's deficit and debt had exposed weaknesses within the single currency zone, showing that economic leadership in the EU is not strong enough and better coordination was urgently needed.
Under a compromise brokered by euro co-founders Germany and France last Thursday, Greece would qualify for assistance only if it were unable to borrow on the markets and it would take a unanimous euro zone decision to trigger a rescue.
Euro zone states would provide the majority, some said two-thirds, of any help in coordinated bilateral loans, on strict conditions proposed by the European Commission and the European Central Bank, while the IMF would provide the rest.
However, many key details remain to be worked out, including the cost of emergency loans, what role the IMF would play and what would happen to its normal conditionality.
The conspicuous silence from Washington since the Europeans agreed to seek its involvement has prompted speculation that the IMF either does not know what role it is supposed to play or is unhappy at being expected to provide funds but not set policy.
Greek officials have said that if Athens has to borrow its total requirement of 53 billion euros this year at current market rates, it would cost at least an extra 500 million euros a year in debt service charges.
That would make it even harder for the government to achieve a promised 4 percentage point cut in the budget deficit to 8.7 percent of gross domestic product this year and get the shortfall below the EU limit of 3 percent by the end of 2012.
"Beyond 2010 our economists are concerned that Greece remains on a sustainable debt trajectory," said Ciaran O'Hagan, bond strategist at Societe Generale in Paris.
"Debt service costs will continue to rise unless yields decline significantly. At the very least this suggests that the current target to reduce the deficit to 3 percent in three years is unrealistic. So we'll face today's concerns next year and the year after," he added.
The Economist magazine calculated Greece would not reach the deficit target until 2014, by which time its debt to GDP ratio would have topped 150 percent, compared to 110 percent in 2009.
