Investors showed scant faith in Greece's ability to cut its colossal debt after an auction on Monday which handed insured holders of defaulted bonds a large payout.
The auction set a price of 21.50 cents in the euro for a selection of Greek bonds, broadly in line with expectations and the best guide yet to the fair value of new bonds issued as part of a deal that cut Greece's debt by 100 billion euros.
The new price - effectively the amount investors expect to get back on the bonds - was a clear sign the market does not believe a debt restructuring and a second international bailout have set Greece on a solid financial footing.
The new Greek bonds are trading at very low (prices) and at very high yield so the market is still pricing in another restructuring, said Nikolaos Panigirtzoglou, a rate strategist at JPMorgan.
The new Greek 30-year bond was quoted in the secondary market on Monday at about 21 cents in the euro and the new bond maturing in 2023 at about 28 cents but with a wide variation between buying and selling prices reflecting thin trading.
Their yields of 15 to 18 percent are among the highest in global sovereign markets, reflecting worries the euro zone's three-year-old debt crisis is not yet over.
These bonds are trading at a huge discount and this tells you the market has doubts about whether Greece will be able to cope but that's been known all along and this auction doesn't change this, said Commerzbank rate strategist Christoph Rieger.
After the auction, only the second of its type involving sovereign debt, holders of credit default swap (CDS) insurance contracts will receive a payout equal to the difference between the recovery rate of 21.50 cents and the full face value of Greek debt. This means a total cash payout of $2.5 billion, according to Reuters calculations.
The International Swaps and Derivatives Association ruled earlier this month that Greece had triggered the payment on the CDS by using legislation to impose losses on all private creditors.
ISDA's ruling is good news for investors who bought insurance against default on the bonds of other weaker euro zone countries, such as Spain and Portugal, because it implies they would get paid if those countries ran into trouble.
Credit default swaps were blamed for worsening the 2008 financial crisis and investors feared they could start a chain reaction with unpredictable consequences in the euro zone.
However, Monday's auction should draw a line under these fears as the $2.5 billion payout is small beer compared with the losses investors have already taken on money lent to Greece.
In order to secure a desperately-needed bailout, Greece forced private creditors to swap their original Greek bonds for new ones worth substantially less.
But secondary market pricing shows investors believe Athens will need another debt restructuring as austerity steps tied to the aid package might tip the country further into recession, making it difficult to meet deficit targets set by its lenders.
Prices of safe-haven German debt rose on Monday, partly reflecting fears about Greece's financial future.
ING strategist Alessandro Giansanti said the low recovery rate compared with the 40 percent normally assumed for sovereign debt, could see investors demanding higher returns on euro zone bonds.
You will know there will be a very low recovery value. That's why you want a higher risk premium in buying these bonds.
(Additional reporting by Marius Zaharia; editing by Nigel Stephenson)