New bonds that Greece will issue this month as part of its debt restructuring are likely to be the highest yielding in the euro zone as creditors price in a high risk of being forced to take yet more losses.
Greece is trying to convince banks, insurers and other investors to take massive losses on their Greek bonds through a debt swap next week, in a bid to slice 100 billion euros (83.5 billion pounds) off its 350 billion debt burden.
But analysts say the target will be hard to achieve. If Greece, currently deep in recession, grows less than expected or runs larger fiscal deficits than planned, it risks having to restructure its debt again or being forced to leave the euro zone to regain competitiveness.
Even after the debt swap, Greece's economic outlook will be worse than that of Portugal, the country seen by many as the next most likely to follow Greece in restructuring.
The new Greek bonds, which mature between 2023 and 2042, are thus likely to trade with a higher yield than Portugal's and some analysts say their prices will imply a more than 50 percent chance of another default.
Their debt is not clearly on a sustainable path - much like people's view of Portugal - and they're going to require further support for the long haul, said Helen Howarth, head of EMEA interest rates strategy at Credit Suisse.
Portugal is very much the floor and the question is what premium over Portugal you put in there, she said, adding that she expected the new bonds to yield between 12 and 15 percent.
The Portuguese 2023 bond last yielded around 14 percent, while the 2037 bond yielded around 11 percent.
Greek economic overview: http://link.reuters.com/rup24s
Portuguese versus Greek yields: http://link.reuters.com/syw36s
Portugal's debt is expected to peak at 118 percent of economic output in 2013, lower than Greece's ambitious target of 120.5 percent in 2020.
Taking that into account, Morgan Stanley strategists say the new Greek bonds should initially yield 200 basis points over the average of the two Portuguese long-term bonds. Yields between 13 and 17 percent imply an average price of 25.2 cents in the euro.
Whether the new bonds gain or lose value in the medium term depends on Greece's progress in implementing the reforms it has agreed to as part of its second bailout, agreed last month.
Based on how the current Greek bonds have traded, Morgan Stanley estimates the average price could move between 16.9 and 30.9 cents. In comparison, German and French long-term debt prices trade above 100 cents in the euro.
A QUESTION OF COMMITMENT
With official creditors such as the European Central Bank exempt from losses on its Greek bond holdings, private bondholders now fear that a precedent has been set for any future restructuring to hit their pockets the hardest.
You would always be worse off than the official lenders so you know that in another restructuring you would lose more, said ING rate strategist Alessandro Giansanti, who expects the new Greek bonds to yield around 15 percent, implying a 50-60 percent probability of another default.
In the worst-case scenario, Greece or its bailout-fatigued partners may start to consider whether the country should exit the euro zone, an option that could cause a chain of domestic bankruptcies and raise fears of other states leaving the bloc.
This would depress bond price even further.
To gauge this risk, markets will look at the results of elections in April. A strong coalition government with a mandate to push through reforms could benefit Greek bonds, but if the post-election rhetoric turns against more austerity markets will begin to question the whole process of saving Greece.
It's commitment to keeping Greece in Europe, that's really the question, Credit Suisse's Haworth said.
That comes from both sides: the euro area and Greece itself. Anything that brings that into focus... will be very negative. Greece leaving the euro is nowhere near priced.
In the short term, though, the new Greek bonds are expected to find more demand than the old ones have seen over the past year as the risk-reward ratio may appear attractive to some hedge funds, analysts say.
A 14 percent yield contains a lot of bad news in it, said Gabriel Sterne, an analyst at Exotix, a brokerage firm specialised in distressed debt.
I don't think it includes complete adherence to the programme, it probably includes them going slightly off track but the Europeans keep pumping the money in. It includes Europe staying fairly well in the doldrums. There is some upside.
(Graphics by Scott Barber; editing by Nigel Stephenson)