By Mark Gilbert
Greece’s bailout reinforces a rally that has driven
yields for Italy and Spain down from euro-era records, giving the region’s leaders time to convince investors they can deliver both economic growth and spending discipline.
“It is good to have cleared the Greek Damocles sword for a few months,” said Raphael Gallardo, the head of economic research at Axa Investment Managers in Paris, which oversees about 515 billion euros ($680 billion). “The euro area governments and
European Central Bank have won some time, two months at least. It is positive for risk assets in the short run.”
Italy’s average 10-year borrowing cost has dropped to below 5.4 percent this year from 7.1 percent at the end of December.
Spain’s 10-year yield is 5.08 percent, down from more than 6.7 percent in mid-November and compared with its 2011 average of 5.4 percent.
Greece’s government has to convince its lenders it can enforce the spending cuts that won it 130 billion euros of aid, its second rescue in three years. French President
Nicolas Sarkozy faces an election, while Italian Prime Minister
Mario Monti has to persuade lawmakers to back labor market reforms.
“The deal may have removed near-term uncertainty, it won’t immediately change our investment view,” said Helen Roberts, who oversees 27 billion pounds ($43 billion) as head of government bonds at F&C Asset Management in London. “People said the right thing, now they need to do the right thing. It’s a hard environment to implement austerity measures. It’s a worry that the Greek government might not be able to do much even though they are fully committed to the agreement.”
‘Containment Walls’
Euro members have spent at least 386 billion euros averting defaults for Greece, Ireland and Portugal, none of which are currently able to sell bonds on the international
capital markets. The euro has held between a low of $1.26 and a high of $1.33 this year, and currently trades at about $1.32. It peaked at almost $1.50 in May last year, and was at a low of $1.2858 on Dec. 29.
“Unfortunately it doesn’t feel like the world has changed a whole lot,” said Arif Husain, the director of European fixed income at Alliance Bernstein Ltd. in London, which oversees $218 billion. “It will be a relief to not have to read the same repetitive headlines each morning. This does hopefully buy some more time for
Europe to further build containment walls and move further toward fiscal consolidation before it has to tackle this problem for the third and potentially final time.”
Unlimited Funds
The ECB will offer a second round of unlimited three-year loans on Feb. 29 via a longer-term refinancing operation, after handing out 489 billion euros in December. That cash has helped drive the Euribor-OIS spread, which gauges banks reluctance to lend to each other by measuring the difference between the euro interbank offered rate and overnight indexed swaps, to its lowest in more than five months, at 68 basis points.
“I invested 10 percent of one of the portfolios I manage in Italian debt in mid-January having never bought Italian
government bonds before,” said Michael Riddell, a London-based
fund manager at M&G Investments, which oversees about $323 billion. “I didn’t think Greece would have a messy default. The enormous liquidity that the ECB is throwing at the market via LTRO is having a much larger effect on peripheral sovereigns than what happens in Greece.”
Avoiding Default
Greece’s latest rescue includes a debt swap with private bondholders who will forego 53.5 percent of their principal by swapping new debt for old.
“The biggest benefit here for investors and for Greece and the
euro zone is that we’ve been able to avoid a disorderly default and all of the negative consequences that would in all likelihood have come with that default,”
Charles Dallara, managing director of the International Institute of Finance, which represented bondholders in the negotiations, said yesterday.
The package means Greece won’t miss a 14.5 billion-euro debt payment scheduled for next month, which risked triggering concern that other nations such as
Portugal, which has seen its 10-year yield stuck above 10 percent for the past six months, might also default.
“You’ve got to be encouraged,” said Geraud Charpin who helps oversee $42 billion at BlueBay Asset Management Ltd. in London. “It has effectively removed the prospect of a disorderly default at the end of March.”
‘Accident-Prone’
A report by the
International Monetary Fund, the European Union and the ECB warned that Greece’s situation remains “accident-prone with questions about sustainability hanging over it.” While the cuts imposed on the nation are designed to get its debt down to 120 percent of gross domestic product by 2020, the report said a worst-case scenario could see that balloon to 160 percent.
“This doesn’t put Greece on a sustainable footing in anything other than a best-case scenario,” said Patrick Armstrong, a managing partner at Armstrong Investment Managers which oversees $353 million and holds a “small amount” of Greece’s March 2012 note. “A default or exit of the euro-region is still very likely at some point.”
Armstrong said the IMF’s growth forecasts are overly optimistic and reflect “the best-case scenario rather than the base-case,” with the government’s inability to generate revenue by collecting taxes likely to undermine its economy.
No Surprise
Greece’s economy will contract 4.3 percent this year and stall next year before returning to growth in 2014, based on the assumptions used in the bailout agreement. Debt will peak at 168 percent of GDP in 2013.
“This is probably the best deal the Greeks are likely to get that is consistent with staying in the euro,” said Toby Nangle, who helps manage the equivalent of about $49 billion as head of multi
asset allocation at Threadneedle Asset Management in
London. “There’s a question mark over Greece’s ability to deliver. People have had a long time to prepare. They ought not to be surprised at what’s going on now.”
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