Greek Deal Fails To Impress
There were few signs of any relief rally in risk assets on Tuesday, following the Greek deal passed last night. The deal was well flagged and with several points of uncertainty, investors have been unwilling to chase risk much higher. After marathon talks which extended well into Tuesday morning, a new bailout deal totalling the full targeted EUR130bn was finalised. Most of the deal’s components had been well flagged to the market in advance, but it was the mere fact that negotiations did not fall apart which has helped stabilise sentiment and allow the euro to maintain a steady footing above 1.32. Although a significant hurdle has been passed and a disorderly default on March 20th appears to have been avoided, several outstanding points remain unresolved. Firstly, the terms on the PSI are slightly harsher than previously determined as private sector investors will need to accept nominal losses higher than previously agreed and at a lower coupon; it remains to be seen whether these terms alone would be enough to trigger CDS as the IIF appears to have stopped short of giving the deal its full endorsement. Second, the Greek government has reserved the right to enact collective action clauses as further measures will depend on private sector participation, though it is already clear that the Greek parliament will move towards relevant legislation in due course. Demands for a larger haircut on private sector holdings appeared to have held up the agreement on Monday, and Eurogroup chair Juncker stressed that a successful PSI is a ‘precondition’ for the successor aid programme. The current calculations suggest that Greek debt will come down to 120.5% of GDP in 2020, broadly in line with the IMF’s definition of ‘sustainability’ but IMF chair Lagarde said that the board would need to decide on the new package and the Fund’s own contribution in the second week of March. In return, Greece has also won debt relief through a lowering of the margin on the loans in the first bailout package to 150bp, while national central banks would also transfer profits to Greece, while Eurosystem holdings would not suffer any losses. A segregated account will be created for aid flows while the troika will enjoy a ‘permanent presence’ to oversee progress on the necessary reforms. Greek PM Papademos said he was ‘happy’ with the result and targeted restructuring to be completed by April. We note that the news overnight does remove short-term uncertainty, but as has been the case so often with the Eurozone throughout the crisis, implementation has proven far harder and there will be new stumbling blocks ahead, not least the prospect of elections returning a government less in favour of today’s agreements. Overnight EURUSD traded 1.3186-1.3293 and USDJPY 79.55-79.81.
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UBS Investment Bank