By: Mike Cambell
As a tool to raise income to service its debt burden partially, the Greek government brought €5bn worth of bonds to the market. The Greek debt is believed to be in the region of €300bn. The issue was well received by the market and rapidly oversubscribed (i.e. demand outstripped supply) which has been perceived as a vote of confidence in the ability of Greece to service its debts. The yield on the bonds was an appealing 6.5% which goes a long way in explaining the issue’s popularity. The European Central Bank has held interest rates at 1% for the tenth month as widely expected, so the yield on the Greek bonds is a highly attractive alternative to leaving money on deposit with European banks if investors are looking for a low risk vehicle and are confident that the Greek government will not default on the yield. In essence, a bond issue is simply a tool by which an issuer can borrow money on the market. It does nothing to improve the Greek debt situation per se; that was why the austerity measures that were announced earlier this week were so important to tackle the underlying problem.
Bank of England and ECB Maintain Interest Rate Policy
In separate meetings, the ECB and the Bank of England decided to continue with their policies of low interest rates as a mechanism to foster the economic recovery for the tenth and twelfth consecutive month respectively. The ECB rate was maintained at 1% whereas the interest rate charged by the Bank of England remains at 0.5%. Both banks are likely to continue with the policy for several more months. ECB President Jean-Claude Trichet has signalled that the time is right for some of the emergency measures to be withdrawn as the fledgling recovery gathers strength.