Europe Economy

Greek Bond Will Succeed, but Problems May Deepen

The Greek government's second bond auction of the year will be one of the key drivers of global markets over the coming days. While no date is yet set, Athens must raise significant funds via bond sales or face the prospect of default.

With the stakes so high, there is very little chance that the bond issue will not be well bought.

However, the reason for which investors will snap up the Greek paper has nothing to do with confidence in the austerity measures, but everything to do with confidence that there is an easy return to be made.

The European Central Bank will underwrite the bond offering via direct lending to Greek and European banks, Bob Parker, a senior advisor at Credit Suisse, told CNBC. Those banks will then snap up Greek debt but demand a higher yield.

Parker therefore sees the spread between Greek 10-year notes and the German bund heading back to 400 basis points, with knock-on effects for Spain and Portugal.

But a higher yield means negative effects for Greece and other countries on the euro-zone's periphery (so-called PIIGS by analysts), which would be forced to put more money into servicing their debt, exacerbating their already serious economic problems.

Another member of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) is Ireland but Parker says recent tough decisions made by the government in Dublin on cutting spending have led to it gaining credibility with the bond market.

Greece, Spain and Portugal will need the political courage to follow the example set by Irish Prime Minister Brian Cowen.