• EU leaders welcome Greek austerity measures and the Euro Group has stated that technical arrangements have been clarified so that the EU can take coordinated action to support Greece if needed. No details are available but it looks clear that Greece will not be left on its own.
  • The rating agency Standard & Poor’s (S&P) yesterday removed Greece from CreditWatch and confirmed the country’s ‘BBB+’ rating. However, the outlook is still negative.
  • Greek bond spreads have narrowed in recent days on the back of support and general positive market sentiment. Going forward, we see room for a further narrowing of Greek government bond spreads to Germany.

On Monday, the Euro Group stated that it “welcomes the report transmitted by Greece on 8 March in response to the Council Decision of 16 February 2010 and the Commission Communication assessing action taken by Greece”. The Luxembourg Prime Minister, Jean-Claude Juncker, who chairs the 16-member Euro Group of finance ministers, said “We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event if it is necessary.” There are still no details about the arrangements but it has been hinted at that the assistance could be given via bilateral loans from EU members to Greece, rather than loan guarantees. The Euro Group has emphasised that the Greek authorities have NOT asked for financial support, something ECB’s Noyer confirmed today. Overall, the Euro Group continues to lend strong verbal support to Greece.

A press release from ECOFIN yesterday similarly stated that, “on the basis of current information, Greece is appropriately implementing the Council’s decision and Greece’s stability programme and the announced measures appear to safeguard 2010 budgetary targets.” From the comments above, it seems fairly clear to us that Greece will get support from the EU if needed. Furthermore, the EU has now clarified the technical arrangements about how to take coordinated actions, which means it can react swiftly if needed, which is somewhat comforting.

Yesterday Greece also got some support from S&P. The rating agency hence affirmed Greece’s ‘BBB+’ rating and removed Greece from CreditWatch. However, it warned that austerity measures HAVE to be implemented if Greece wants to avoid a rating cut within the next 18-24 months. S&P also said that it will be difficult for Greece to comply fully with its planned consolidation path; hence the outlook is still negative.

Supportive comments from the EU and S&P have buoyed Greek bond markets in recent days. Bond spreads to Germany consequently narrowed substantially in last days. More specifically, Greek ten-year government spreads to Germany have fallen below 300 as we speak, from 311bp mid-last week. The peak in spreads was seen at almost 400bp end- January 2010. Credit-default swap spreads also narrowed significantly.

Currently, the global risk sentiment is positive. The stock market liked what it heard from the Fed yesterday evening. Adding verbal support from EU and S&P, we see room for narrower Greek government bond spreads to Germany in the coming days and weeks. It looks fairly evident that the EU will not leave Greece on its own.

In the medium term, the key challenge for Greece will be to implement the promised measures and our fear is that final demand may become even more depressed from tighter fiscal policies. This could lead to a larger drop in GDP and consequently make it impossible for Greece to achieve a 4pp improvement of the fiscal budget in 2010.