Hopes of progress on Greek PSI talks

The outcome of the Fed monetary policy meeting which took place on Wednesday as well as the recent developments in the Greek situation spurred market optimism on Thursday. Rumors circulate that the meeting between the head of the Institute of International Finance Charles Dallara and senior bankers in Paris resulted in a new private sector creditors offer of an interest rate of 3.75%.

Another controversial issue on Greece’s tortuous negotiations appears to be whether the ECB is willing to participate in the debt swap, and European legislators are now keen to point out that the boost to sentiment would be very strong, at very little financial cost to the ECB, the UBS Strategy Analyst Geoffrey Yu observes. “The legality and principles behind such a step remain over to interpretation, but the lack of denials by the central bank may be enough to keep risk rallying until talks end – wires reported that the IIF will meet with the Greek government on Friday to discuss ‘legal and technical issues'” Mr. Yun extended.

European Commission spokesman Amadeu Altafaj confirmed on Thursday in Brussels that the Troika is not considering a ECB writedown on Greek debt. Eurogroup Chair said that even if the ECB accepted losses by participating in debt-swap talks, they would be small. This announcement comes after IMF head Christine Lagarde put pressure on the ECB on Wednesday to take part in Greek debt restructuring.

According to Michel Derks from FxPro: “The ECB will be livid about the IMF’s stance. Two former members of the ECB Governing Council, Weber and Stark, resigned because they fundamentally disagreed with the bond-buying program and no doubt others in the ECB are just as uncomfortable. Buying the bonds of Europe’s fiscally miscreant sovereigns was something the ECB clearly did not want to do, but was forced to undertake in the interests of attempting to preserve market stability.”

Italy bond auction meets target

At a the first debt auction held in Italy after S&P downgraded the country by two notches, the Italian Treasury managed to sell 500 million euros worth of inflation-linked securities out of a 250-500 million euro target. Papers maturing in September 2014 were sold at an average yield of 3.2%.

Italy also auctioned 4.500 million euros of 2-year, zero-coupon bonds. Yields on these papers dropped to 3.76% (in comparison with 4.85% at the end of December).

On Monday Italy will hold an auction of 5- and 10-year bonds.

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