Recent market speculation around Greece’s creditworthiness has driven CDS spreads to all time wides – five-year insurance on the Greek sovereign reached 15% last week. With this in mind and in the light of extensive and sometimes inaccurate media commentaries, we thought it would be useful to highlight the current issues.
The European Financial Stability Fund and the IMF have approved a multi-year loan plan for Greece with quarterly payments out until 2013. In order to receive these payments, Greece has to conform to a series of austerity measures and asset sales. Importantly, the current bailout envisages Greece at least in part, returning to the capital markets for debt in early 2012. However this must be viewed as highly optimistic in the current environment. This would leave Greece with a funding gap by March 2012.
This leads to another problem, which is that the IMF has an internal rule that it cannot lend to countries with a funding gap! This means that the €3.3bn IMF payment due to be paid at the end of June may not be made. Clearly this would be a problem as these monies are required for debt repayments.
So what next?
Greece can either push through new austerity measures and asset sales large enough to bridge the funding gap, or more likely agree with the EU/IMF that they are taking additional steps which would allow the EU make further funds available to ensure that there is no funding gap. The EU would then need to agree to this additional financing, most likely at the eurozone finance ministers meeting on 20 June; this would then need to be ratified at the next EU summit on June 23/24. If this is all approved the next €12bn will be released to Greece on time at the end of the month.
Should this happen, we will most likely see a relief rally, but in the meantime the market will remain volatile and participants will be hanging on EU ministers’ comments looking for the slightest clues. If markets turn too negative, then don’t be surprised to see some sort of extraordinary meeting of ministers. Also we would not be surprised to see the EU/IMF taking a more hands-on role with the Greek privatisation programs should they conclude that Greek politicians are not moving fast enough.
Our view is that a sovereign default is too big for the markets to handle at this stage, and the resolve of the EU is just too high to allow it, so we will all be breathing a sigh of relief (at least for now) at the end of the month.
