Greece: Light after the tunnel?

Escrito el 16 Marzo 2010 por Antonio Rivela Rodríguez en Uncategorized

As I mentioned many times in prior blogs I was absolutely sure that the European Union was going to help their Greek neighbours.
My feeling is that Eurostoxx equity index will increase by 10%/20% levels towards 3,500 area by the end of 2010.
Another interesting transaction that I would recommend is to structure a credit linked note with a AAA collateral and a credit default swap on Greece. Southern European Financial advisory firms like netvalue financial advisors, superderivatives.com, inverseguros or AFI – analistas financieros internacionales are able to value synthetic structured transactions or derivatives linked to Greece.

See below for Bloomberg article.

March 16 (Bloomberg) — Europe’s blueprint for a financial lifeline to Greece amounts to an unprecedented bet by finance ministers that they can avert a euro crisis by sidestepping the no-bailout rules intended to sustain the 11-year-old currency.

Improvising their way through the euro’s harshest test since its debut in 1999, officials meeting in Brussels late yesterday and today worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster.

German bonds, Europe’s benchmark, slipped amid concern that the stopgap solution will leave the euro area’s $12 trillion economy with the same muddled management system that failed to prevent Greece’s slide toward the fiscal abyss.

“What they are working on is the bare minimum,” said Philippe Moreau Defarges, a researcher at the French Institute of International Relations in Paris. “It’s all very ad hoc. The crisis isn’t over. There’s an element of just crossing their fingers, hoping the crisis won’t spread.”

The aid negotiations were led by Luxembourg Prime Minister Jean-Claude Juncker, the only political leader left from the generation that wrote the original euro treaty in 1991.

That document put interest rates in the hands of the Frankfurt-based European Central Bank while leaving each government to pursue its own taxing and spending policies. It barred bailouts of countries that bungle their budgets.

‘Strong Incentives’

Juncker defended the contingency plan as “in line with the treaty and providing strong incentives to return as swiftly as possible to the markets.”

Germany’s Bundesbank, the model for the ECB, emerged as the fiercest defender of the rulebook. The bank’s president, Axel Weber, tipped as a possible candidate for ECB leader, said on March 9 that he opposes the “institutionalization of emergency aid.”

Aid to Greece would probably come through governments pooling funds to extend direct loans, said a European official who asked not to be named. The meeting didn’t resolve the size of future loans, which countries would offer them or how long they would last and cost.

While Dutch Finance Minister Jan Kees de Jager urged charging Greece “an effective premium,” Greek Finance Minister George Papaconstantinou countered that current 10-year rates over 6 percent would be “very hard to live with.”

“It’s a very tricky game for politicians right now,” said Carsten Brzeski, an economist at ING Group in Brussels who used to work at the European Commission. “They have to play for time.”

Debt Redemptions

The crunch may come in April and May, when Greece faces more than 20 billion euros in debt redemptions. The Greek government survived a test this month when it sold 5 billion euros in bonds.

What would trigger the lending also was left open. Loan guarantees wouldn’t be part of the package, Juncker said. Final decisions will be up to EU leaders, though not necessarily at their next scheduled summit on March 25-26, he said.

The struggle over the financing details threatened to derail the package, with Germany, the country behind the euro’s anti-deficit bias, saying it would act only as a last resort.

German Finance Minister Wolfgang Schaeuble, who last week called for the expulsion of uncompetitive, debt-prone nations from the euro, called the aid strategy a set of “technical” preparations.

“We would have to react if insolvency were imminent,” Schaeuble told German lawmakers in Berlin today. “It’s not happening and that’s why there are no political decisions.”

Biggest Stakeholder

German bonds fell on concern that Germany, as the bloc’s largest economy and biggest stakeholder in the ECB, would foot the bill. The 10-year German yield rose 1 basis point to 3.16 percent.

“It’s evident there are faults in system,” said Marco Valli, an economist at UniCredit Group in Milan. “It’s a gradual process. The solution is still far off.”

While Greece’s woes contributed to the euro’s 10 percent drop against the dollar since November, it remains 17 percent overvalued, based on a Bloomberg index of purchasing power parities.

The currency gained as much as 0.4 percent today after slipping 0.7 percent yesterday on concern that a protracted battle over a financial backstop for Greece would expose the flaws in Europe’s handling of the economy. It traded at $1.3721 at 1:45 p.m. Brussels time today.

‘Not in Danger’

“The euro is certainly not in danger,” ECB President Jean-Claude Trichet told Euronews. “But we must not be complacent.”

Greek bonds gave up early gains fueled by the aid pledge. The 10-year yield rose 1 basis point to 6.22 percent. The extra yield on Greek over German bonds stayed at 306 basis points, down from 396 basis points on Jan. 28.

Greek Prime Minister George Papandreou’s bid to cut the deficit to 8.7 percent of gross domestic product in 2010 from 12.7 percent last year hinges on quelling the unrest that led last week to the year’s second general strike.

More than 60 percent of Greeks back the austerity plans, while more than 52 percent doubt they’ll work, according to a Marc poll published this week in To Ethnos newspaper.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Mark Deen in Brussels at markdeen@bloomberg.net.

Antonio Rivela


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