EU reaches agreement on Greece - again

• EU leaders yesterday reached a new agreement on help for Greece. The agreement includes a back-stop guarantee with a combination of EU loans and IMF loans in the event that Greece is not be able to get market financing.
• The ECB yesterday also lent a helping hand to Greece as it extended the minimum rating threshold for collateral.
• The question is whether this is enough to regain confidence in the markets and lure investors back to buy Greek bonds and cause spreads to narrow further.
• First, the EU needs to stand united behind the agreement and support it verbally in the weeks ahead. Second, the next Greek supply due in April is expected to show whether this “soft guarantee” has been enough to lure back investors.
• We change our tactical recommendation on Greece from underweight to neutral. For Buy and Hold investors, less sensitive to market volatility, we recommend starting scaling into Greek bonds.
  

EU agreement on Greece

• Euro area members are ready to provide bilateral loans as part of a package involving substantial International Monetary Fund financing and a majority of European financing.
• The mechanism will only be provided if “market financing is insufficient” – and hence is only a back-stop guarantee if Greece cannot finance its debt in the market.
• Any loans will only be granted after a unanimous decision.
• Loans will be subject to “strong conditionality” and based on an assessment by the European Commission and the European Central Bank.
• Interest rates will be non-concessional – i.e. will not contain any subsidy element.
• A task force has been set up to come up with measures to strengthen the surveillance and instruments to prevent a budget crisis and prepare a framework for crisis resolution.
• The aim of the agreement is to send a clear message that Greece will not be allowed to default and should it come in a situation where financing cannot be obtained, the EU and the IMF would provide the loans needed. But apart from that there is no help for Greece.
• However, Greece needs a firm – and united – commitment from the EU in order to convince markets that it will get help if needed. This is necessary to lure back investors and get financing costs down. At current yield levels it will be very difficult for Greece to get the fiscal situation under control. The stability programme is based on financing costs of around 4½% and the 10-year Greek yield is currently 6.18%, down from a peak of 6.44%.

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