What’s wrong? well..
What’s wrong with Greece bailout II…
Posted by Neil Hume on Jul 25 10:10.
… in three easy-to-read paragraphs.
From Jacques Cailloux and his team at RBS.
1. Greece Bail Out II now detailed, rolling crisis still likely: The Euro Summit was first and foremost a summit aiming at concluding the negotiations surrounding Greece Bail Out II. This is now done. The political will of some countries to get PSI at any cost won the day which will have a number of negative side effects (rating downgrade for Greece and potentially other countries, ECB requirement for additional guarantees for Greek collateral, market perception that PSI might be a template for other countries) while not bringing substantial economic benefits. Indeed, after almost 3 months of negotiations and effort, the Greek debt load will be at best reduced by 10 to 20 percentage points of GDP to what will still be seen as an unsustainably high level. Overall, this will have been an expensive political decision. In the end, Greece will likely continue facing a rolling crisis around IMF quarterly reviews. Doubts about the trajectory of the economy and the ability to raise privatisation receipts anywhere near the targets will persist.
2. Toolkit to respond to euro area contagion rushed out: The statement clearly gives the impression that euro area policy makers are increasingly ‘getting the message’, with 3 new tools being created: a precautionary programme, a lending facility for non programme countries to recapitalise banks and a bond buying programme in the secondary market. However, the level of detail provided is low, making it hard at this stage to really tell how the new tools will work in practice and how efficient they will end up being. In particular, there is insufficient information available to tell how preventive those tools will end up being deployed and this is related to the lack of clarity surrounding the so called “appropriate conditionality” that will be imposed on member countries accessing these new help mechanisms.
Indeed, intervention in the secondary bond market will be on the basis of an analysis by the ECB and then a “decision by mutual agreement of the EFSF/ESM Member States, to avoid contagion”.
3. Nice tools but no firing power: In our view a key limitation of the announcement is that it did not address the size of the EFSF. We have recently argued that a prerequisite to increase the flexibility of the EFSF was to increase very significantly its size with a view of ultimately having a lending capacity of around Eur2trn. Indeed, under the amended EFSF which will aim at having a lending capacity of Eur440bn, and given current and likely commitments, the EFSF will be left with a little more than Eur300bn of lending and or buying capacity – a too small amount to restore investor’s confidence that the euro area has once and for all dealt with its sovereign crisis. The crisis will in our view linger with markets likely to test the EFSF firepower.
Which is exactly what seems to be happening.
CDS spreads have continued to widen on Monday morning, according to figures just in from Markit:
Sovereigns – Greece 1675bp (+41), Spain 320bp (+11), Portugal 920bp (+10), Italy 263bp (+9), Ireland 870bp (-10)