LONDON—The Greek government’s new austerity measures drew a positive response from European credit and currency markets, further allaying fears that Greece might default on its debt obligations.
European Pressphoto AgencyA sculpture of a stock chart at the Athens Stock Exchange, shown last month, seems to aptly show the up-and-down market situation in recent weeks. As worries rose, the markets would fall—and vice versa. On Wednesday, investors took heart in Greece’s austerity plan.
Heard on the Street
The measures, which will save the Greek state €4.8 billion ($6.5 billion) a year, include steep cuts in civil-service salaries and entitlements, as well as a rise in Greece’s sales tax by two percentage points.
In the credit-default-swap market, the cost of insuring Greek sovereign debt against default continued to fall Wednesday. The annual cost to insure €10 million of Greek government debt for five years was €301,000 in late afternoon, compared with €320,100 Tuesday, according to CMA DataVision.
The cost hit a peak of €425,000 on Feb. 4.
Still, the cost of Greek sovereign-default insurance remains the highest of any euro-zone member. For comparison, the annual cost of protection against a default by Germany was €35,000 Wednesday, according to CMA DataVision.
Credit-default swaps are derivatives that function like an insurance contract against defaults on debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Swap buyers may be protecting investments they own or simply making bearish bets against companies or countries.
The cost of insuring Greek debt had already fallen this week ahead of Wednesday’s announcement, on the expectation that it could pave the way for support measures for Greece from France and Germany.
The differential in yields on 10-year Greek government bonds and euro-zone benchmark German bunds narrowed to 2.89 percentage points. The spread is 0.22 percentage point down from Tuesday’s closing level of 3.11 percentage points.
The current gap means that investors in Greek debt demand a yield of 2.89 percentage points more than what is available on German bunds to compensate them for the greater risk involved. Greek 10-year bonds yield 6.07%.
Like the cost of credit-default swaps protecting against a default by Greece, the yield spread on Greek debt relative to bunds has been narrowing in the past few days, including Wednesday morning, in anticipation of further Greek austerity measures.
Meanwhile, the euro was stronger against the dollar, rising to $1.3731 by midday in New York, compared with $1.3609 late Tuesday.
Gary Jenkins, head of fixed-income research at Evolution Securities, said Wednesday’s announcement would give European Union governments more political capital in the event that they do eventually need to provide liquidity to Greece, as they would be able to tell their own taxpayers that Greece has taken further measures as requested by the EU.
“In fact today is just about facing the reality that the original targets [for deficit reduction] would not be reached without further cuts,” he said.
—Mark Brown and Gary Stride contributed to this report.