The weekend’s eurozone loan plan put a spring in Greece’s step in debt markets on Monday — as these snaps from Reuters show.
GREEK 2-YEAR GOVERNMENT BOND YIELD FALLS OVER A POINT TO AROUND 5.9 PCT – TRADER.
GREEK BANKS JUMP 8.7 PCT ON EU RESCUE PACKAGE, TIGHTER YIELD SPREADS.
GREEK 5-YEAR CREDIT DEFAULT SWAP TIGHTENS TO 359 BPS FROM 426 BPS AT NEW YORK CLOSE FRIDAY – CMA DATAVISION
GREEK 1-YEAR CREDIT DEFAULT SWAP TIGHTENS TO 453 BPS FROM 649.6 BPS AT NEW YORK CLOSE FRIDAY – CMA DATAVISION
GREEK 2/10 YR YIELD CURVE STEEPENS TO 80 BPS FROM AROUND MINUS 15 BPS AT FRIDAY’S SETTLEMENT -TRADEWEB
Meanwhile, the euro hit its highest level in a month against the US dollar in the wake of the bailout. It rose as high as $1.3691 but is now trading at $1.3605, which is actually down on the day.
Anyway, time for the obligatory classical reference.
But as the shout became louder and nearer, and those who from time to time came up, began racing at the top of their speed towards the shouters, and the shouting continually recommenced with yet greater volume as the numbers increased, Xenophon settled in his mind that something extraordinary must have happened, so he mounted his horse, and taking with him Lycius and the cavalry, he galloped to the rescue. Presently they could hear the soldiers shouting and passing on the joyful word, “The sea! the sea!
– Xenophon, Anabasis, Book 4, Ch. 7
Or θάλαττα, θάλαττα!, in the ancient Attic.
Perhaps the Greek prime minister George Papandreou would have been apt to quote from Xenophon’s tale of a Greek army’s epic march to safety through the wilderness, as news of the loan deal emerged on Sunday.
Or maybe not. Analysts remained measured over Greece’s long-term debt prospects in their Monday notes. Here’s Erik Nielsen of Goldman Sachs (emphasis ours):
In my view, this is good news because the amount of money is more than I had expected (although for only a 12 months period), although the program would still not be fully funded (but close.) Even if it were to be a full EUR45bn for the first 12 months, this would cover “only” about 2/3 -3/4 of their needs during this period…
The issue of whether this is concessional or not will be debated for a long time. My view is clear: Sure it is concessional, so we’ll probably see some interesting court cases if the loan gets disbursed.
Referring, of course, to the threat of cases being brought to Germany’s Constitutional Court on the argument that the European Union treaties do not allow ‘bail-outs’ – and that German taxpayers do not like paying for them either.
Evolution Securities’ Gary Jenkins develops the short-term good, long-term bad call (emphasis and links ours):
In the medium term it opens up a can of worms. Are EU member states not allowed to go bust? In which case can a lender presume that they are all joint and severally liable for the debts of each other? If that were to be the interpretation then over time one would expect Bund yields to start to rise (all other thing being equal) as why lend to Germany at 3.1% when you can lend to Greece at say, 6%? This is not a tenable long term structure for the EU.
In addition, whilst I would expect a positive reaction in the markets today there is still the question of whether the EU is just kicking the Greece problem down the road. Whilst one should never underestimate the importance of liquidity (look at how long Madoff kept going) there will still be questions in the market as to the real resolve and commitment of the EU if the Greek economy continues to deteriorate more than expected.
On Friday it was announced that Greek Industrial Production was down 9.2% against a year earlier, while inflation rose to 3.9% year-on-year, these figures put in question the growth figures that the government’s deficit numbers are based on as a shrinking output base will make revenue collection more difficult.
I would guess that Fitch was not in receipt of these figures when it decided to downgrade Greece to BBB- with a negative outlook on Friday. The agency said increasing funding costs as well as a deterioration in the growth outlook will make it harder for the government to achieve its fiscal targets. Be interesting to see the rating agencies reaction today as the real short term prospect for default has clearly rescinded, even if economic long-term outlook is just as cloudy.
Interesting to see, indeed, given that Fitch has historically been the first mover over Greece action, Standard & Poor’s and Moody’s having followed quickly in its wake.
Let’s see how high this cat can bounce.
Related links:
Robbing Pedro to pay Paul (of Greece)… – FT Alphaville
Greece Sovereign Debt Crisis & Co-ordination Failure – Aly Iman, Long Room
‘The deterioration in fiscal balances has been structural rather than cyclical’ - FT Alphaville