Markets seem to be turning cautiously optimistic toward a favourable outcome materialising for Greece.
Bond yields on Greek sovereign debt today hit their lowest levels since the government restructured a portion of its debt held by private investors back in March of this year.
On Friday, Citi’s economics team, which has been outspoken in ascribing a 90 per cent chance to Greece exiting the euro before the end of 2013, lowered the odds to 60 per cent – and that call seems to capture the tone toward Greek bonds right now.
As Morgan Stanley strategists Paolo Batori, Robert Tancsa, and Daniele Antonucci note this morning, Greek bonds have been steadily rising since late July – along with most other risk assets – when Mario Draghi said the ECB would do “whatever it takes” to save the euro and subsequently followed through by announcing the framework for the ECB’s new rescue plan, OMT.
The chart shows a pretty sharp bottom in Greek debt around that time:
Photo: Morgan Stanley
And yields on Greek sovereign bonds are down nearly 3.4 per cent today on comments from German finance minister Wolfgang Schaüble over the weekend that a Greek debt default would not be allowed to happen.
Domestic German politics were the main reason Citi cited in lowering the odds of a Greek exit from the eurozone as well.
Here is what the Citi economists had to say about how upcoming elections were altering the general attitude toward Greece in the German government:
We think the position of German Chancellor, Angela Merkel, with respect to Grexit, has shifted recently as the German elections are getting closer (September 2013, most likely) and she fears the negative economic repercussions of an event like Grexit on her chances of reelection.
Moreover, almost three years since the beginning of the euro crisis, the German Chancellor may have realised that any major deterioration in the euro periphery (and Grexit would probably be the worse of all seen so far) eventually requires painful concessions to reduce the negative spillovers to other peripheral, and core, euro countries. The Greek debt restructuring and the rising costs of recapitalising Spanish banks have put on the table a new thorny issue such as the euro area banking union.
A “coordinated” Grexit would probably require at least some sort of deposit guarantee scheme to be in place to avoid, or at least contain, bank runs throughout Europe — something that Merkel probably does not want to discuss ahead of elections given the strong opposition from large parts of the German public opinion. Support for a banking union from the German opposition party SPD is unlikely – support that would be required to get its approval in Parliament.
The Morgan Stanley strategists say that as a result of the apparent softening in the German position toward Greece, they expect that Greece will be able to negotiate a better deal on its bailout, particularly with lower interest rates charged on the loans as well as a lengthening of the period over which the loans can be repaid.
Furthermore, Batori, Tancsa, and Antonucci think official-sector holders of Greek debt will restructure portions of their holdings as well, something currently seen as taboo by those public institutions. They write:
Medium-term debt sustainability remains one of the main concerns in Greece and hence we cannot rule out some form of additional debt relief at a later stage. Our analysis on the debt stock and, more importantly, on the cash-flows related to debt service shows that a meaningful relief can only be provided by the official sector. Hence, we don’t think that a ‘PSI only’ scenario is a likely outcome. In fact, both a thorough analysis on the legal framework and past experience from Paris Club restructurings point towards a combination of PSI and OSI where all investors would be treated with comparable terms.
The troika of official sector creditors – the ECB, IMF, and EU – are reviewing Greece’s progress on the current bailout programs and will report in November. This has been declared by European leaders to be the next step in determining whether Greece’s bailout terms will be relaxed.
For now, Morgan Stanley recommends that “investors should hold on to their long [Greek government bond] positions, in our view, and accumulate on the back of a potential favourable outcome in the Troika review.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.