Hope of fresh Greek rescue lifts markets
MARKETS across Europe opened to a strong rally yesterday after reports that Germany is weakening its opposition to a second Greek bailout.
The initial burst of risk appetite was later knocked by US data and further doubts on Greece, but the euro nonetheless gained 0.9 per cent against sterling, 0.75 per cent against the Swiss franc, and 0.6 per cent against the greenback by evening.
The markets even brushed off Greek retail sales data showing a 17.5 per cent year-on-year plunge in consumer spending in March, even worse than the 10.5 per cent drop seen in February.
The optimism was fuelled by the prospect of an extension in Greece’s €110bn (£96.2bn) bailout loans that might not also include a broader restructuring of its debt to other creditors. Germany has been pushing for a “soft restructuring”, forcing private creditors and the ECB to take some of the pain by extending the maturity of their loans to Athens, a stance firmly opposed by the ECB itself.
“While the EU finance ministers and the ECB were broadly always against any form of soft restructuring, the real sticking point was the German… push for an early rescheduling of Greek bonds,” said analysts at BNP Paribas in a note.
The German insistence on burden-sharing, in part driven by popular domestic opposition to another bailout, had barred a deal because the ECB is anxious about allowing haircuts both on the Greek debt it holds and on that held by banks across the Eurozone.
Capital Economics’ Jonathan Loynes said: “This stand-off was threatening to blow up between the European Commission and the ECB. If Germany is backing down on the bailout that does diffuse that situation for a while.” But he added: “What seems to happen with these bailouts is that each one has a smaller impact on markets than the previous one.”
FAST FACTS | WHAT ARE GREECE’S OPTIONS?
A SECOND BAILOUT
Seems to be the most likely near-term option. It would probably consist of an extension in the maturity, cutting the interest and possibly increasing the size of the bilateral emergency loans that made up Greece’s first €110bn bailout, but without extending this to Greece’s other debts. It is likely to come with harsh conditions attached such as an extension of state asset sales and more spending cuts. Even if Greece were capable of delivering on this, most economists see it only as a stop-gap measure.
“REPROFILING”/“SOFT RESTRUCTURING”
The lightest form of burden-sharing, this would involve creditors agreeing to extend the maturity of all Greece’s debts. However, the ECB, one major creditor, is fiercely opposed to granting relief without evidence that Greece has at least met some of the conditions of its first bailout. Ratings agencies have also said that the move would constitute a “selective default”.
BROADER VOLUNTARY RESTRUCTURING
This could equate to a 50 per cent haircut on Greece’s debt via cutting coupon rates and extending maturities. Economists think this will have to happen; the question is when.
HARD RESTRUCTURING/EURO EXIT
The EU/ECB are strictly against this “Doomsday scenario”. It could impose haircuts of 75 per cent on Greece’s creditors, which include the EU and major international banks. ECB board member Juergen Stark says it would be “worse than Lehman”. But others argue it would be better for Greece in the long run.