January 28, 2010 / 8:25 AM / 9 years ago

Greece denies China bond sale, markets dive

* Greece says there is no bond deal with China

* Greek/German bond spreads hit euro lifetime high

* Greece reiterates plan for investor roadshow in Asia, U.S.

* Data show room for Asians, Americans to expand holdings

* But China unlikely to take big risk with foreign reserves

By Dina Kyriakidou and George Georgiopoulos

ATHENS, Jan 27 (Reuters) - Greece on Wednesday denied press reports it had chosen Goldman Sachs (GS.N) to sell up to 25 billion euros ($35 billion) of bonds to China, sending Greek government debt prices sharply lower and hitting the euro.

Greece, facing a budget crisis, reiterated plans for an investor roadshow in Asia. But traders, who have been hoping for a major deal with China to ease Athens’ problems, said the denial removed an important factor supporting Greek bonds.

The euro sank to a six-month low against the dollar and concerns about Greece helped push down European stocks, also boosting risk aversion that sent U.S. Treasury prices higher.

Greece’s problems put a cloud over the outlook for Europe and its impact on global growth. Euro periphery markets also took a beating on Wednesday, as Portugal received a warning on its rating from Fitch on deficit concerns. [LDE60Q1GU]

“The ultimate fear is always contagion and the global recovery is fragile. So will it go to Portugal or Spain and so on?” said Scott MacDonald, head of research at Aladdin Capital in Stamford, Connecticut.

The Financial Times reported Greece was asking China to buy up to 25 billion euros of debt, with U.S. investment bank Goldman Sachs promoting the deal to Beijing. Dow Jones Newswires quoted an unnamed source as saying Greece was trying to place as much as 20 to 25 billion euros with Chinese investors.

But the Greek finance ministry said in a statement: “The Finance Ministry categorically denies that there is any deal to sell Greek bonds to China. The Finance Ministry has not mandated Goldman Sachs to negotiate any deal with China.

“The figures reported are not true,” it added.

About 20 billion euros of Greek sovereign bonds will come due in April and May.

The spread of the 10-year Greek bond yield GR10YT=RR over German Bunds EU10YT=RR, a measure of the risk investors see in holding Greek debt, ballooned by as much as 69 basis points to 373 bps — its highest level since Greece adopted the euro currency in 2001.

The decline erased market euphoria from Greece’s sale of eight billion euros in five-year bonds on Monday, which caused optimism that it could finance its growing debts in 2010.

“The question of serviceability really remains,” said Dan Cook, senior market analyst at IG Markets in Chicago. “It’s kind of like if someone runs up their credit cards and can’t pay them off so they just get a new credit card with a higher limit, only a higher interest rate as well.”

Greek banks lost about 6 percent on funding fears, dragging Greek stocks down by nearly 4 percent.

However, billionaire investor George Soros said Greek debt “might” be worth buying — although he does not trade — as he said he was confident Greece will do whatever it needs to stay in the euro zone [nLAE000040] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

((For a Graphic on Greek share prices and bond spreads, click here ))

((For an Interactive Factbox on Greece and its economy, click link.reuters.com/kut84h )) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

ROADSHOW PLANS

Goldman Sachs declined to comment on whether it was targeting Chinese investors with Greek debt. A source familiar with the situation said that while Goldman was keen to do further business with Greece, there was no project under way to place debt specifically with Chinese investors. [nLDE60Q1E9]

Hammered by the debt market for months, Greece has had to pay hefty premiums to plug funding holes and has been exploring ways to expand its investor base.

The government had previously announced it would stage a roadshow for investors in East Asia, including China, and the United States sometime this year. The head of its debt agency

(PDMA) said on Wednesday that no date had been set.

Finance ministry officials said the roadshow might take place at the end of February or in March, depending on Greece’s borrowing plan, which has not been finalised. The government expects it will need to raise 53 billion euros this year; on Monday it was forced to offer a very high yield on its five-year bonds that will increase its interest costs in the long term. It plans to issue 3 to 5 billion euros of 10-year bonds in February.

Between 2005 and 2009, Asian investors accounted for only 2 percent of Greek bond allocations and U.S. investors just 3 percent, suggesting Greece may have plenty of room to attract more funds from those regions, PDMA data shows. Most Greek bond issues have gone to European investors.

“The exposure of the U.S. and Asia to Greek government paper is relatively minimal. Therefore there is fertile ground, if we convince them, to invest,” said Panagiotis Dimitropoulos, treasurer at Millenium Bank in Greece. “Expanding the investor base is good, it makes perfect sense.”

UNLIKELY

But Dimitropoulos and others said a purchase of Greek debt as huge as 20 or 25 billion euros by a single country at a single time appeared unlikely.

The Greek press has been rife with speculation about possible Chinese investments in Greece since 2008, when Chinese port operator Cosco Pacific (1199.HK) signed a 3.4 billion euro deal to run and upgrade facilities at Piraeus Port (OLPr.AT), Greece’s biggest. None of those deals has materialised.

With over $2 trillion of foreign exchange reserves, China could afford to buy large amounts of Greek debt, and it has been moving to diversify away from dollar-denominated assets.

But it wants to do so gradually, and China’s government is under domestic political pressure to conduct foreign investment carefully after losses during the global financial crisis.

“I think Beijing will basically weigh up the pluses and minuses before making any decision,” said Zhang Xiaojing, director of the Institute of Economics at the Chinese Academy of Social Sciences, the government’s leading think tank.

“After all, there is uncertainty about whether Greece will be able to pay back its debts. I think Beijing will be relatively cautious about buying any of these bonds.”

Also, a purchase of Greek debt as huge as that mentioned in the press reports — almost half of the country’s annual borrowing requirement — could be politically sensitive for both governments, by suggesting Greece was turning to China rather than its fellow euro zone members for a rescue.

Other euro zone countries have been pressing Athens hard to cut its budget deficit, as some investors speculate that Greece might eventually have to leave the zone if it cannot bring its finances under control.

The chairman of the zone’s finance ministers, Jean-Claude Juncker, said on Wednesday that he did not see any risk of Greece going bankrupt or leaving the zone, and that he approved of Greek budget consolidation measures so far. [nLDE60Q1H1]

(Additional reporting by Aileen Wang in Beijing; editing by Stephen Nisbet)

((dina.kyriakidou@thomsonreuters.com; +30 210 3376455; Reuters Messaging: dina.kyriakidou.reuters.com@reuters.net)) Keywords: GREECE BONDS/

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