This morning we have had to cut through a raft of EU leaders spelling out how wonderful the deal was and what an achievement it is to have bailed Greece out a second time (surely it' yet another sign of how lax the Eurozone' budget rules were for the last decade?) But what is the meat of this deal and what does it mean for Greece?
The basic structure of the second bailout is: 1, an extra EUR 130bn of bailout funds 2, an escrow account will be set up to hold a minimum of three months' bond redemption payments and thus avoid a Greek default for the time being 3, an EU task force will have a permanent presence on the ground in Athens to help it reign in its enormous, tangled web of a bureaucracy. 4, bond holders have agreed to a deal to cut EUR 100bn from Greece' obligations to private sector bondholders and 5, official sector relief to Greece has been agreed in the form of national central banks channelling any profits they make on their Greek debt holdings back to Athens to reduce the overall bailout bill.
This is where the latest Greek bailout gets complicated. Essentially member states have agreed to reduce the interest rate it charges to Greece for bilateral bailout loans, but to make up for this loss the ECB will channel any profits on its EUR 40bn of Greek debt holdings to the national central banks. Essentially this is as close as we'll get for now to the ECB helping out sovereigns with their debt load and is yet another example of the complicated channels through which the currency bloc' authorities are dealing with the sovereign crisis.
So is this progress? Yes and no. Yes, in that the Greeks have failed to reign in their deficits or meet debt targets in two years of crisis, so having a permanent European presence in Athens may help to implement some much-needed structural reform. Yes, in that the IIF seems to be on board with a higher than expected notional haircut on private sector bond holdings, and the IIF Director came out today and said the deal was fair to both sides. Both of these measures may help Greece on its way to try and achieve the Eurozone' target of 120.5% debt-to-GDP ratio by 2020.
But we still have elections in April, with the two main parties in Greece unlikely to receive an overall majority according to the latest polls. So could Greece renege on its 'promises' of more austerity in the next few months? Added to this although other European bond markets have been fairly calm in recent weeks, the fact that Greek bond yields haven't fallen on the back of this deal is concerning. It suggests that investors are still expecting Athens to default whether there is an escrow account or not.
If everything was fine and dandy and Greece expected to pay its debts in the future then why is the Greek parliament due to vote later this week on the introduction of Collective Action Clauses into Greek bonds. This would force losses on bondholders, and is hardly likely to fill investors with confidence. If Greece does this, what would stop Portugal from following suit?
Hence, even though Greece has been given another bailout its 10-year bond yields remain above 30%, likewise, Portuguese bond yields have also given back some of their recent gains. But in this environment of easy money investors' appetite for risk remains huge hence demand for Spanish and Italian debt remains strong.
But what about the euro? EURUSD has made three attempts at 1.33 today and failed each time. This could be a sign that the bulls are weakening and are not strong enough to push EURUSD over the next major hurdle towards 1.35. We would also note that the riskiest end of the FX spectrum is struggling today. AUDUSD is below 1.07 while AUDJPY is also falling. In the short-term demand for risk is weakening. This could be investors booking profits waiting to see the fallout from this morning' deal. So a pullback is completely normal. But if we see a drop below 1.32 in EURUSD, 1.06 in AUDUSD and 2,500 in Eurostoxx 50 then something fundamental has changed to dent sentiment. http://thefasttracktrader.us/
Aside from the European news, the UK recorded its largest budget surplus in 4 years in January. However, January is usually a good month for revenues and the government coffers so this was no surprise to the market, which is why GBP is moving with overall risk sentiment. Spain also managed to sell short-term debt today at attractive yields, which suggests that for now Europe has ring-fenced Greece' problems. http://fasttracktrader.us/
So there we have it: risk may take a breather today, but as long as Greece' (on-going) problems don't infect Italy and Spain then the recent rally we have seen may be able to extend for a while longer. http://thefasttracktrader.info/