Greece - a quick update

By Eoin Fahy, Tuesday, 4th May 2010 | 0 comments

* The EU and IMF approved a joint €110bn funding package for Greece at the weekend, over three years. Although figures like that have been rumoured for the last few days, this was the first formal confirmation of the amount.
* In return, the Greek government agreed a further €30bn package of austerity measures, involving de facto public sector pay cuts and another rise of 2% in the standard VAT rate, among other things.
* The amount means that Greece will not have to raise any money from the bond market for at least two years, giving it a valuable breathing space.
* The interest rate to be paid by Greece on the loan will be around 5%, far less than the market rate, where 10-year bonds yields are around 8.7% (two year: 10.8%, five year 10.5%) at the time of writing.
* The money should be available for Greece starting next Monday (10th).
* The ECB has, in parallel, announced that Greek government bonds will continue to be acceptable as collateral for its money market operations, even though its low credit rating might have excluded the bonds were it not for a change in ECB rules.
* There has been a huge push on German parliamentarians to approve the deal, and now the legislation to approve the deal is expected to pass both houses of parliament on Friday. Nonethless, this is not a certainty and it remains the key remaining issue in the short-term. There is an important regional election in Germany on Sunday, so political tension is high around this issue.
* The bond markets have of course improved, but remain nervous. Greek government bond yields are only back to where they were about ten days ago, and are still far higher than even, say, a month ago. Portugese ten-year bonds are now about 5.3%, vs about 4.2% a month ago, but 5.9% at the worst last week. Irish 10 year bonds now yield 5.1%, vs a recent worst level of 5.3%.
* In contrast, equity markets haven't shown that much reaction. Since Friday, most markets are somewhere between down 2% and up 1% - a fairly normal range.
* Bond market nervousness is probably based on the view that although the EU deal will certainly solve Greece's liquidity problem, it doesn't necessarily solve its more long-term solvency problem. Many - though not all - analysts still expect Greece to have to restructure its debt in the years ahead, despite the deal, as its debt burden is so big and its growth prospects so poor. But this is much more of a medium-term issue than one for the next few weeks, or even months.


Our take :  Assuming there's no glitch in the German parliamentary approval process, the immediate pressure has been relieved.  Much will depend on the extent to which Greece actually implements its spending cut commitments over the next couple of years, and the extent to which Portugal and Spain, in particular, take the necessary steps to make sure that their public finances are seen by the markets as being sustainable.

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