–First ran on Mainwire at 1639 GMT/1239 EDT Wednesday
Cailloux believes it will take time for the markets to swallow its
doubts, but the sheer volume of debt which Greece still needs to put out
there is another factor:
“Another element is that the country will have to access the
markets quite a lot from here until the end of the year. So, with a huge
amount of issuance still to be done, the market is still not ready to
jump on the paper because it knows that there is still quite a lot of
paper supply which is coming in.”
Sabuco believes some investors have decided to shift into less
risky paper:
“I think that there are investors who have chosen to sell their
Greek bonds. They likely consider that, despite the support mechanism
announced, the investment in Greek paper is too risky and would thus
switch to another country’s bonds”.
Cailloux says that some Eurozone banks seem to have put strict
limits on how much they are prepared to invest in Greek bonds:
“It looks like the banking system in Europe has restrictions in
terms of total size of exposure to Greece which has been put in place
while the crisis was unfolding which is limiting somewhat the potential
purchase of Greek paper at this stage.’
Fortis Analyst Nick Kounis says that there is a more fundamental
flaw in the Greek backstop plan:
“This European/IMF plan – certainly the European part was not aimed
at reducing Greece’s high debt service burden. They will provide funds
which will be probably above market rates”.
He continues:
“They would want to give Greece an incentive to go back to the
markets as quickly as possible and would only step in if market
financing was unavailable. This agreement does not really improve the
outlook for Greek debt”.
EU leaders had obviously bet on the idea that the plan by itself
would provoke a positive market reaction, but that did not materialise,
Kounis noted.
“Greek bond yields, they have actually, on balance, risen since the
announcement. Markets are not convinced and the reason is that it does
not really offer Greece real help. It just says, ‘OK, if the market’s
not there, we’ll step in. But you will pay. We will not subsidize
you.'”.
But, as Kounis points out, the markets believe that what Greece
needs is an outright and explicit subsidy. Greece is committed to an
austerity plan which will take 10% of GDP out of the budget deficit –
historically unprecedented. To achieve that, the country needs real help
from the EU but is not receiving it.
“The general sense is that Greece is in quite a big hole and is
trying to get out. Europe isn’t offering real help at the moment. They
hope that they can help by improving market confidence, but this is
proving to be not enough.”
Goldman Sachs’ Dirk Schumacher says that Greece’s real problem is
stabilising its economy and achieving growth rather than its funding
concerns:
“Growth is needed, they are still stuck in a recession and we will
see whether they can get out of that” – “Borrowing costs/debt
sustainability is not as crucial as stabilising the economy”.
Kounis’s criticism of the EU rescue plan does not apply to the
International Monetary Fund’s role. But the rumour is that, while the
IMF would provide funds at a lower rate, it would not cover a large
quantity of funds.
“The lower interest rate that the IMF would provide would probably
not be over such a large amount of funds that it would materially change
the picture in terms of Greece’s debt dynamic”.
Kounis says that the fact is that the EU plan is not really aimed
at helping Greece so much as preventing a euro zone default and so
protecting the rest of the euro zone from the dreaded contagion fear.
The more sanguine Green believes that the markets have calmed down
to some degree but he concedes that Greece needs funds – “sooner rather
than later”.
“We look for Greece to do at least another two more big syndicated
sales — in April & May”.
Orlando Green rejects ideas that Greece will face default and that
they will go to the IMF/EU for help. But there are certainly dangers
ahead, he agrees:
“A default isn’t our central scenario. We think Greece will
continue raising funds in the market, they still have access to the
markets and don’t see them going to the IMF/EU for help. But there is a
risk of this, there is no doubt about that”.
Goldman’s Schumacher agrees that Greece will get the funds it needs
from the markets – “one way or another in the next couple of months”.
But, he continues – “…that does not mean they are not out of the
woods. There is a lot of debt coming due in the next 2 years and it is
not clear whether they can achieve reduction in deficit that they intend
to do”.
But Schumacher says that it can’t be ruled out that the present
EU/IMF deal is the best help Greece can get – “given that the euro zone
government said that there won’t be a subsidy”.
For the immediate future, Schumacher says, “Greece has to implement
what they said they are going to do and we think they will. We will then
see how effective this is in raising revenues and then whether we see a
stabilization of growth or not”.
Greek 10-year spreads are currently trading at +343bp. This is
roughly 44bp above Friday’s level when the EU/IMF bailout plan was
welcomed by the markets. The spread hit its recent peak on Jan. 28 at
+398bps, a level which has otherwise not been seen while Greece has been
in the euro. Greece attempted euro entry in 1999 but failed to meet the
entry criteria. It joined later in 2001.
–London Bureau/Frankfurt Bureau; emails: nshamim@marketnews.com;
twailoo@marketnews.com; dthomas@marketnews.com; Tel: +442078627492
[TOPICS: M$X$$$,MT$$$$,MGX$$$,MFX$$$,MFXBO$,M$$FI$]
