Having watched Greek bonds plunge to new lows on Thursday, as credit default swaps on Greece set new records it was practically de rigueur to consider this as some soft of tipping point.
But a tipping point to what? Analysts stepped in to comment on Thursday — mostly in favour of a new EU-IMF rescue plan.
Fitch’s Greek analyst swung his weight behind Greece going for support, in a Reuters interview on Thursday. The rating agencies are in a particularly influential position here – even Fitch.
Nick Kounis of Fortis Bank also set out the case for financial support in a note to clients:
The negative market reaction reflects disappointment in the results of last week’s Greek bond issues as well as (probably false) rumours that Greece had tried to re-negotiate IMF involvement in the assistance plan. However, most of all, the sell-off in Greek bonds is due to a complete lack of confidence that the Eurogroup/IMF financial assistance package will do any good or indeed whether it constitutes much of a package at all…
…The one – now extinguished – hope was that the package would indirectly help by driving down Greek government bond yields. Instead, Europe’s gamble has failed spectacularly and the surge in yields makes it even less likely that Greece will be able to get out of its fiscal black hole without a real helping hand.
…Only a more generous package will restore market confidence. The key obstacle to such a package seems to be Germany and a lack of German domestic public support for a support package. However, it seems unlikely that Germany would stand by and let Greece default because it would have serious consequences for financial stability in the eurozone as a whole.
Meanwhile, Stephen Lewis of Monument Securities outlined the tightrope walk Greece and its eurozone partners face in the absence of a rescue (emphasis ours):
The real mystery in all this is why the markets should ever have believed that Greece’s sovereign debt difficulties had been overcome…
Euro zone leaders insisted at the summit that their mechanism would not be put to the test and that the Greek Government would be able to raise market finance on acceptable terms, but it always seemed likely their bluff would be called. The German authorities appear no less reluctant now than they were last month to extend bilateral credit to Greece while the respective responsibilities of the EU institutions and of the IMF in any bail-out remain undefined…
It still seems highly unlikely that, in the last resort, EU leaders would not swallow their pride to the extent of allowing an IMF-mediated rescue for Greece, in the event that an EU-led bail-out proved impracticable or illegal. The damage to the European ideal in that event might be extensive but not as great as would follow a debt default by one of the euro zone’s member-governments.
And how’s this for apocalyptic, from Lewis:
Our chief worry all along has been that the terms on which Greece received international credit might be so onerous as to trigger political and social breakdown in that country. The result then might be that there would be no effective government in Athens willing to undertake the servicing of the debt, let alone the economic conditions attaching to a bail-out.
As for the economic conditions that Greece could be set — writing before the full extent of Thursday’s carnage, Goldman Sachs’ chief European economist Erik Nielsen had this to say on fiscal tightening in tandem with IMF support (emphasis ours):
Good thing the IMF has arrived in Athens [for a technical advisory visit, according to Kathmerini]. I suspect that the government and the IMF have now have had the first round of discussions on the outline of conditionality…
We’ll probably get lots of confusing noise in coming weeks on this front, but at the end of the day, I think we’ll get an IMF program (co-financed by the Euro-zone) before the end of the month. My guess continues to be a 18-months program worth some EUR20-25bn. The IMF will charge a bit over 3% and the Europeans probably 4%-5%. Unfortunately, that’ll cover only a small share of the government’s total financing requirement for the 18-months, so the overall debt sustainability will hinge on implementation of the conditionality – and on a multi-year extension of concessional financing. The combination of uncertainties in this respect and the need for continued commercial financing during the next 18 months to fill the (post IMF-EU) hole makes it difficult to see how the official sector will put the Greek concern to bed. (But they’ll take us through May.)
Not exactly cheery — but still radically different to the pessimistic scenarios recently painted by Simon Johnson and Peter Boone, in a long (but by now must-read) Baseline Scenario post. The theme is one of varying shades of managed default.
Yikes. Hard road ahead. We’re too depressed even to make the obligatory Greek odyssey joke.
Related links:
Trichet: ‘Default is not an option for Greece’ – FT Alphaville
Want to help Greece? There’s an account for that – FT Alphaville
‘No chance of Greece going bankrupt’ – FT Alphaville
The Greek tragedy, recapped – FT Alphaville’s Greek round-up