Friday, March 26, 2010

Will the Greek safety net work?

The EU/IMF "safety net" for Greece is intended to make it possible for Greece to refinance its maturing bonds and thus preempt the need for the net to be drawn upon. While it is too soon to judge whether this maneuver will satisfy the bond market, so far it hasn't. 

Much will depend on the scale of the package in relation to the Greek debt calendar. It is very unlikely that the package will be equal in size to Greece's maturing debt in 2010-11. The package is said to be about EUR25 billion, while the Economist estimates that Greece needs at least EUR75 billion. 

Any rescue requires the unanimous consent of all 27 EU members, which is not a given.

Greece needs its spreads to come in by at least 200bps; so far it has tightened by ~20bps.
The ECB has relaxed its collateral eligibility requirements for 2010-11, so that Greek bonds would still be eligible for discount in the event of a ratings downgrade by Moody's. The ECB has not revealed the amount of Greek debt that it has taken as collateral (or owns outright), and may come under pressure to do so.
A larger question is whether risk managers will continue to tolerate large exposures to Greece, or will reduce concentration limits on all things Greek. I can't imagine that this is not happening globally. 

The things to look for over the next months are:
  • The scale of the package
  • Political developments in Greece
  • Greek fiscal performance
  • Bond and swap spreads

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