In addition to the worrying explosion in Greece's six-month bill yield, shown right, now Greece's two-year short-term bond yield has brushed against the 8% level.
Investors are losing faith in Greece's ability to refinance itself, not just in the long-term, but even in the short-term. Which poses an immediate challenge to Europe because Greece simply can't sustain itself if it has to pay the rates that the market is now demanding.
The volatile bonds movement prompted the European Central Bank to ease the pressure on Greece’s troubled domestic lenders, who have seen €8 billion flow from their coffers in recent weeks. The ECB said that it would prolong a loosening of the rules on using government bonds as collateral for its loans. Bond market analysts believe a rescue is almost inevitable if yields continue to climb as they did yesterday — in the case of the two-year bond by a full percentage point to more than 8 per cent.
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Jean-Claude Trichet, the ECB chairman, was at pains yesterday to dispel any doubts about Greece’s solvency. He denied the extension of looser collateral rules was aimed at Greece and said: “Taking all the information I have, default is not an issue for Greece.” His comments were not enough to calm bond and share markets, which suffered a sharp sell-off yesterday in response to the Greek scare.
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