Greek bonds not all bad

There is real cause for concern around a Greek bond market collapse, but the picture is not all bad, according to experts within Bank of New York Mellon, Paul Brain and Gunther Westen.

Brain, the head of fixed income at Newton, and Westen, the head of asset allocation and fund management at WestLB Mellon Asset Management, have pointed to the key issues surrounding the debt crisis in Greece and their implications for institutional investors.

Brain said that while markets had so far been happy to overlook the consequences of a Greek bond market collapse, the severity of the situation suggested there was cause for real concern for European banks holding Greek debt.

He said that in these circumstances, the International Monetary Fund (IMF) needed to support Greece through its near-term funding problems, paving the way for European Union support, which would become available for the rest of 2010.

Notwithstanding the problems confronting Greece, Brain suggested that holding Greek bonds was not all bad.

“There is still some appeal to be found in Greek bonds as their current yield levels imply an assumption that Greece has no chance of avoiding default or restructuring,” he said.

“Greek bonds are yielding more than those of emerging market government bonds which have received IMF support, or have gone through a restructuring program,” he said. “The Greek Government has already put in place stringent plans to reduce its burgeoning deficit. In addition, Greece has also been promised an abundance of near-term EC/IMF support.”

Brain said that with these supports in place, “we would be more comfortable holding Greek Government bonds than, for example, those of Portugal, Italy [or] Spain, which have yet to address their issues”.