German Chancellor Angela Merkel and French President Nicolas Sarkozy have agreed to a deal over the next Greek bailout that includes no involuntary involvement of Greek bondholders, according to Reuters.The deal is in line with the Vienna Initiative, a support initiative for Eastern European banks sorted out in 2009 that involved no forced losses on bondholders.
What’s important here is that Merkel has publicly backed down from her perceived position that the private sector take a hit in the next Greek bailout. This means that in bailout 2, there will be no credit event, so long as the rollover of debt doesn’t trigger a ratings downgrade.
The exact number for a bailout still remains unconfirmed, but €150 billion is the speculated price.
The key thing to remember here is this: If Prime Minister Papandreou’s government falls in a no-confidence vote on Sunday or Monday, then all bets are off on bailout two, as then there would be no guarantee of EU support.
Markets, however, are now bullish as a result of this new Merkel-Sarkozy agreement. By Monday, however, it could be irrelevant.
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