Greek government sources have given some more details this morning of the aid package Greece will get. It will be for 3 years with €30bn from the EU at 5% and €10bn from the IMF at 3.75%. Yesterday danger signs were flashing on not only Greek bonds where the bund spread got near to 6%, Portugese CDS surging 50 bps to 270bps and Spanish CDS jumping to a fresh record of 175 bps. This contagion is what is putting pressure on the EU to act. The IMF has a wider perspective and can see the Greek contagion spreading to non-EU sovereign debt as well. Many countries have far to much public and private debt so conditions are ripe for a spread of this contagion.
Yesterdays panic was set off as I predicted by the revelation that the Greek budget deficit last year was larger than previously reported. There is still talk from Greece of debt restructuring. This would be very dangerous and is not a cheap solution in the longer term. The Russians defaulted in 1998 and had their debt restructured eventually by the London creditors club but have paid for it by being shut out of the capital markets until this week when they sold their first dollar bonds for over 11 years. Bond markets have long memories!
Civil unrest and strikes continue in Greece and the IMF have not yet started! The Parthenon was closed to visitors yesterday by a public sector strike.
In Germany the right wing Free Democrats called for Greece to 'voluntarily step out side the Eurozone' if it cannot comply with the austerity demands. "Any other way is frankly a placebo to calm the markets". How very true. The Germans as a whole are very wary. Its their money and future money they can see disappearing into a bottomless pit.
The semi-announced solution is not a done deal. I give below some analysts comments quoted on Reuters this morning:
SEAN MALONEY, RATE STRATEGIST, NOMURA
"I don't necessarily think we're out of the woods here because there's a fair bit of wrangling to go in terms of how much the package is going to be, and the terms that are going to be attached to it. I think the reaction we've seen so far is understandable but whether it extends another significant amount from here is another question.""
PHILIPPE GIJSELS, HEAD OF RESEARCH AT BNP PARIBAS FORTIS GLOBAL MARKETS, BRUSSELS
"It does not come as a surprise. Even if there is a short term solution there is still uncertainty. It still has to go through national parliament and we do not know what the reaction of Germany will be. Does this mean it stops here or will it spread to Portugal and Spain. I think it will still weigh on markets and it is not a done deal."
DARAGH MAHER, DEPUTY HEAD OF FX STRATEGY, CREDIT AGRICOLE CIB
"It's a positive development in the short term. The comments coming out of Germany suggest they won't be stonewalling Greece's request.
"In the longer-term, it's just a sticking plaster over the situation. The question remains how can Greece extract itself from its problems, and the situation remains highly uncertain.
"The euro has not seen a sizeable bounce. It shows investors remain uncomfortable with being bullish on the euro."
GERHARD SCHWARZ, HEAD OF GLOBAL EQUITY STRATEGY, UNICREDIT (Milan: UCG.MI - news)
"It (the aid package) is something that might help market sentiment in the short term because it could alleviate the fears that have arisen regarding a possible debt restructuring for Greece that was discussed in the markets lately. But at the end of the day it is nothing that will solve the fundamental problems of the Greek government."
PETER CHATWELL, STRATEGIST, CREDIT AGRICOLE CIB
"We aren't really much further into solving the problem - we need to know how much Greece will get and when, so uncertainty will continue to be a problem, hence no major reaction since the formal announcement."
BEN MAY, EUROPEAN ECONOMIST, CAPITAL ECONOMICS
"It is certainly no surprise; we have been feeling for a little bit now that it was inevitable that they were going to ask for it sooner rather than later. With the pressure on the markets in the last few days it really was inevitable.
"The yields have fallen back a bit but they are still incredibly high, which perhaps suggests that there are still doubts about whether the aid can be delivered fast enough. But I think there are probably ways around that ... I am sure the money will come to Greece sooner rather than later.
"But the bigger picture is still that there are huge issues in the medium term in terms of Greece getting its finances in order.
"This certainly does not mark the end of the crisis, there's still much further to go. They've still got the medium-term problems of getting their public finances in order, and obviously the issue of competitiveness."
Its not over until the fat Greek lady sings!
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