Credit markets respond positively to Greek austerity measures

Spreads referencing Greece in both the cash and credit default swap markets tightened significantly following the Greek government’s announcement on March 3 of austerity measures worth €4.8 billion.

The cost of five-year credit protection on Greece tightened from 320 basis points on Tuesday to 295bp at the close of trading on Wednesday, continuing the contraction over the past week. Greece’s CDS spread was 400 basis points on February 25.

With contagion fears easing, CDS levels on other Mediterranean countries also narrowed. The cost of five-year protection on Portugal has tightened from 181bp on February 25 to 128bp at yesterday’s close; while Spain’s CDS spreads have moved in from 142bp to 103bp over the same period.

In the cash market, Greek government bonds have also benefited from the improving sentiment. The price of its recent five-year bond, completed on January 26 with a nominal coupon of 6.1%, has risen from 97.331 on February 25 (giving a yield of 6.66%), to 100.64 on March 3 (for a yield of 5.926%).

The government’s most recent 10-year issue, completed last October with a 6% nominal coupon, has performed even better in recent weeks. On January 28, the bond was trading at a price of 92.156 for a yield of 7.152%; at yesterday’s close the price of the bond was 100.110 for a yield of 5.938%

The Greek government’s austerity package – made up of cuts in the wages of public sector employees, a 2% increase in VAT and higher taxes on alcohol, tobacco and luxury goods - will help cut its fiscal deficit by 2% of GDP from the current level 12.7%. The government says it wants to reduce its fiscal deficit to 8.7% of GDP by the end of 2010.

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