It’s not a bailout — honest, according to the European leaders who reached an accord on Thursday over a ‘financing plan’ to help Greece, in case it can’t raise funds through the market in the near future.
Well, let’s just see what Friday’s markets thought about that — and what might happen to those Greek refinancing efforts when they begin.
After all, according to Moody’s on Friday, via Reuters:
10:07 26Mar10 RTRS-MOODY’S SAY MARKET REACTION TO SUPPORT PACKAGE IS KEY TO DETERMINING GREECE CREDIT QUESTION
In which case, let’s look at credit default swaps. Greek 5-year CDS narrowed to 299 bps by 10 am London time on Friday, from 311 bps at New York’s close on Thursday. The spread for Greek/German bond yields tightened to 309 bps on Friday compared to 320 at close. As context, both indicators had breached 400 bps on January 28, as Dow Jones reported at the time.
The head of Greece’s debt management agency has already insisted to BusinessWeek that Thursday’s accord ‘wipes out’ the risk of Greek default. Well, he would say that.
Break out the ouzo, then? Er… well, let’s see what analysts were saying about Greece’s market prospects on Friday.
Goldman’s chief European economist Erik Nielsen, who correctly called Thursday’s accord ahead of time, argued in his note on Friday:
I would expect the Greek government to go a long way to avoid the IMF, and therefore try and raise from the market the necessary EUR10bn or so to get through the April-May hump. This would have to happen during the next couple of weeks. Maybe the news of an IMF program as a back-up would be good enough for them to be able to raise the necessary money? – but remember that EUR22bn is only about half of their needs for long term debt amortizations during the next 18 months, and they’ll also need to borrow for the deficit and for the short term roll-overs – which largely depends on the ECB.
Ah yes, the European Central Bank, which U-turned on revised its minimum collateral threshold on Thursday. This allowed BBB+ assets to remain eligible beyond the end of the year, as well as introducing a more graduated policy on haircuts to manage the risk. The WSJ, for one, thinks this takes some credit risk off Greece in the event of a ratings downgrade. This will only help Greece post-accord, won’t it?
Nielsen doesn’t exactly agree (emphasis ours):
Two quick comments:
(1) If they keep the nuclear option (that a country can lose eligibility all together), even if three notches lower than before, then markets will continue to price some risk that this might happen in the future – and if the agencies downgrade Greece (or others) in coming months, then the anxiety of recent months will return; please don’t take us there! This is an unnecessary risk to run when they are at it anyway.
(2) How do you introduce a sliding scale without raising the haircut on the weakest credit? Well you could lower it on the best credits, but they are very low to begin with – so, Greek haircuts are almost certain to increase. Not good for the Greek sovereign – or their banks – unless you think that this will be more than outweighed by the somewhat lower probability of them losing eligibility all together. I belong to those who never thought it realistic at all that they would lose eligibility all together, so to me, today’s announcement by the ECB is a net negative for Greece.
Hmm. Compare BarCap European Credit Alpha note (which came out just before Thursday’s accord was announced) on what the ECB move means for Greece issuance:
The key implications are that, first, Greek banks, which are large holders of Greek sovereign debt, will continue to pledge these as collateral to the ECB in order to secure funding. Second, demand for any potential future Greek issuance will be much stronger than would otherwise be the case. Greek banks have bought perhaps close to half of the sovereign’s issue so far this year, a substantial portion of which is on repo with the ECB.
Which is just as well for Greece. But, as BarCap went on, the sovereign risk genie has spread well beyond the Aegean:
…the acuteness of Greek liquidity needs has pulled attention away from the fiscal situation of other European countries. The UK, Spain, Portugal, Ireland, and Italy all face a steep process of fiscal adjustment.
…
Unless a systemic solution to Europe-wide sovereign issues is reached — and it is difficult to envision what form such a solution would take — investors will remain concerned about fiscal deficits, debt, and liquidity issues across the continent. In our view, this could limit the potential upside to generic credit valuations once Greece’s liquidity needs are resolved. The sovereign spread floor was raised rapidly in 2010 but it looks likely to recede more slowly.
Don’t trip up on the way down, European sovereigns.
Related links:
The Greek bailout, according to Paris and Berlin [updated] - FT Alphaville
Portugal v Greece on sovereign risk – FT Alphaville
Greece, the IMF, and the ECB – FT Money Supply
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