Greece's cost of borrowing has risen sharply this week thanks to a return to political uncertainty and fears that next year's draft budget will not be approved by the country's international creditors.
While nowhere near the dizzyingly high levels that sent the country to ask for an international bailout in 2010, yields on 10-year sovereign Greek debt hit 6.284 percent on Wednesday—the highest level since August 13. Yields remained elevated on Thursday at 6.123 percent. According to Bank of America Merrill Lynch, Greek bonds have gained around 44 percent over the last year, making them the top performer out of all global equity and bond classes.
In addition, spreads on Greek five-year credit default swaps (CDS) continued widening, suggesting a fall in perceptions of the country's credit worthiness. On Wednesday, spreads widened by 15 basis points or 3.2 percent, making Greek CDS one of the day's weakest sovereign performers, according to Markit.
Investors are concerned that politicians will fail to agree on a new president to replace Karolos Papoulias in March. This could trigger early elections—a regular occurrence in Greece—and cause the current coalition government to collapse.
In turn, this could jeopardize Greece's progress in making economic reforms, on which continued assistance from the "Troika" of international organizations in charge of Greece's 240 billion euro bailout—the European Central Bank, the European Commission and the International Monetary Fund is contingent. Currently, Greece hopes to graduate from its loan program in 2016 without further assistance—just as Ireland and Portugal did this year.