London/Athens: Financial markets on Monday saluted a euro zone deal on a huge standby rescue package for Greece, slashing the debt-laden country’s borrowing costs and buying its stocks and bonds.
But doubts remained about whether the weakest of the single European currency’s 16 members would use the bailout fund and if it would be able to manage its €300 billion debt mountain over the longer term.
The yield on short-dated Greek government bonds fell by over a point to around 5.9% and the cost of insuring Greek debt against default narrowed dramatically from Friday’s close as markets digested the bigger-than-expected EU rescue plan.
The yield on its 12-month T-bill came down even more sharply, dipping some 268 basis points to 5.28%, normalising a yield curve that had inverted last week to suggest the threat of a near-term default had been lifted.
“The support package for Greece agreed over the weekend should ensure that it is able to meet its financing needs over the next year or so, but it does not guarantee Greece’s long-term solvency,” said Ben May of Capital Economics in London.
Euro zone finance ministers agreed on Sunday on a €30 billion ($40.1 billion) package of three-year loans at interest of about 5%, if Greece requests help, with the International Monetary Fund expected to supply an additional €15 billion in the first year.
The deal, which would be worth €45 billion in the first of three years, with more to be negotiated later, could amount to the biggest multilateral financial rescue ever attempted, dwarfing past IMF programmes for Mexico and Argentina.
In the short term, the existence of a detailed standby plan, even if Greece has not decided to invoke it, should help Athens auction a planned €1.2 billion in T-bills on Tuesday, building confidence in the market.
“Three-, six- and 12-month T-bill yields have come down to around 4.5 to 5.5% from 7.0 - 7.5% on Friday. There have been trades at both the bid and the offer. Yields at tomorrow’s T-bill auction should be in this area,” said a senior dealer at a Greek bank.
However, Greek policymakers and media were under no illusion that a short-term boost might not be enough to prevent the country having to seek a bailout in the longer run.
“It offers a sigh of relief ... but it doesn’t solve our problems,” the centre-left daily Eleftherotypia, which supports prime minister George Papandreou, said in an editorial.
“The country is heavily indebted and has to lower its debt if it wants to survive in the long term. In other words, the others ‘saved us’, now we have to save ourselves.”
Papandreou is implementing a tough austerity programme designed to cut this year’s budget deficit by four percentage points to below 9% of GDP. But Greece’s debt mountain, equivalent to 125% of annual economic output, is set to continue rising.
IMF managing-director Dominique Strauss-Kahn said in a magazine interview the only solution for Greece in the longer-term was a painful period of deflation, in which wages and prices have to fall to regain competitiveness.
“The only effective remedy that remains is deflation,” Strauss-Kahn told Austrian magazine profil in an interview. “And that is exactly what the European Commission has correctly recommended.”
The agreement on a specific, detailed rescue plan with interest rates significantly below last week’s market rates represented a political climbdown by Germany, Europe’s biggest economy and main paymaster, which had demanded market rates.
The risk premium that investors charge for holding Greek debt rather than benchmark German bunds immediately narrowed when markets reopened on Monday by some 60 basis points to 334 basis points, its tightest since late March.
The Athens bourse’s banking index was up 9.36% to 2,323 points at 0740 GMT with bellwether National Bank rising 10.6% and Alpha Bank up 9.39%.
“It’s a positive reaction after the clarification of the rescue plan terms and the amount, which was above expectations. The tightening of yield spreads also helps,” said analyst Nikos Galousis at Kappa Securities.
Traders had dumped Greek bonds and shares, especially in banks, in a growing market panic last week amid doubts about the availability of a euro zone rescue due to opposition in Germany.
Greece needs to borrow some €11 billion by the end of May to refinance maturing debt and interest charges. If this week’s T-bill auction goes well, it may bring forward a planned dollar bond auction tentatively set for later this month.
A successful return to the markets after last week’s fright would enable Athens to delay any request for aid at least until after a key German regional election on 9 May, seen as a major political test for Chancellor Angela Merkel.
Her centre-right coalition’s majority in the upper house of the federal parliament is at stake in the vote in North Rhine-Westphalia, Germany’s most populous state, and public opposition to any bailout for Greece is strong.