Greek Markets Continue to Slide -- 3rd Update

By Tommy Stubbington 

Greek markets buckled Wednesday with the aftermath of Syriza's election victory continuing to shake investors' confidence in the country.

Stocks and bonds in Greece have been hit hard by fears that the antiausterity party could derail the terms of its financial support from its European partners, resulting in another default on its debt or even an exit from the eurozone.

Bank shares, which are always closely tied to the country's government bonds, were also weighed down by growing fears that Greeks are moving their money outside the country to shelter themselves from the possibility that the country exits the eurozone.

The bonds selloff accelerated Wednesday. Traders said Syriza's postelection rhetoric and choice of a right-wing antiausterity party as its coalition partner have fanned investors' concerns that the new government is set for a showdown with its creditors.

Syriza leader Alexis Tsipras on Wednesday reiterated he is ready to negotiate a debt reduction. "The market is pricing in a restructuring of some form," said Richard McGuire, a fixed-income strategist at Rabobank.

"Eventually we think a compromise will be reached with the Troika, but you'd need a very strong stomach to buy into Greek markets at the moment, " he said.

Short-term bonds, a gauge of investor concern over the possibility of default, sank particularly heavily. The yield on two-year debt rose by 3 percentage points, an enormous move by bond-market standards, to nearly 17%. Yields rise when prices fall.

Greek bonds maturing in 2019, issued last year at a yield of just under 5%, now yield over 13%. As a whole, Greek bond yields are closing in on the highs they hit in early January when markets first began to worry about the prospect of a Syriza victory. Greek stocks traded down 9.5% in the European afternoon.

"I don't find it comfortable investing in Greece right now. The risk of restructuring is just too high," said Torgeir Høien, a portfolio manager at SKAGEN Funds who sold all his Greek bonds late last year.

"We have a very peculiar coalition governing the country now. The only thing binding them is their opposition to the terms of the bailout. Any restructuring would be likely to affect privately-held debt," he said.

But not all investors are giving up. Japonica Partners, a Rhode Island investment firm that in 2013 said it was one of the largest holders of Greek bonds, hasn't sold any of its holdings, according to Chris Magarian, its finance group director. Relatively low interest costs on emergency loans mean Greece's debt burden is lighter than commonly thought, he said, adding that he believes Greek government bonds are set to recover.

"We are pleased for the Greek citizens who said no more to those who sold fear. Greece has the opportunity for a fresh start," he said.

Stocks tumbled for a third straight day. Athens's main stock index hit its lowest level in more than two years. Bank stocks were hit particularly hard, with Piraeus Bank S.A., Eurobank Ergasias SA, National Bank of Greece S.A. and Alpha Bank AE all falling by more than 20%.

Outflows from Greek banks accelerated in January, according to a report published by Moody's Investors Service this week, with around 5% of deposits having left the banking system since the end of November.

"The uncertainty has fueled renewed speculation around the risk of a Greek exit from the euro area, and damaged depositor confidence," said Nondas Nicolaides, an analyst at Moody's.

"Potentially the biggest losers from the Greek election, and the extended period of uncertainty that markets may be in for, will be those that hold Greek assets, especially if Greek banks continue to face liquidity constrains as depositors take money out of the financial system," said Maria Paola Toschi, a market strategist at J.P. Morgan Asset Management.

The Greek wobbles dragged down broader European markets, which had started the day with an upbeat tone following a strong finish to U.S. markets overnight. The Stoxx Europe 600 was 0.2% higher midafternoon, but Spain's IBEX 35 fell 1.2% and Italy's FTSE MIB by 0.4%..

Bonds in Italy, Spain and Portugal all declined, giving up part of the gains run up since the European Central Bank last week announced a bond-buying stimulus program.

Safe-harbor German bonds rose, with the 10-year yield falling to 0.37%,

Write to Tommy Stubbington at [e-mail]

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