Photo: Flickr/World Economic Forum
There is a big rally happening in Greece today.Stocks are up 1.8%.
The yield on Greek 10-year bonds are falling significantly, to below 15%. This is far better than at any time since Greece’s debt restructuring in the spring.
What’s going on?
Two things: One is that Greek has revealed the technical details of its debt buyback plan (as part of the recent bailout plan, there is an offer to buy back debt held by private investors).
More significantly, German leader Angela Merkel has hinted that in a couple of years, it will be reasonable to write off some amount of existing Greek debt. It’s long been argued that at some point, Greece will need to have some of its debt just ripped up, and now Merkel is talking about it.
“If Greece one day can rely once again on its own revenue, without having to borrow, then we’ll have to look at this situation and make an evaluation,” Merkel told Bild am Sonntag in an interview when asked about the prospect of debt forgiveness. It wouldn’t happen before 2014 or 2015, “if everything goes according to plan,” the chancellor said.
Now this is a lot packed into a couple of sentences, so let’s break it down.
One line that stands out is “If everything goes according to plan.” This kind of line is inherently fraught with risk, and as Nick Malkoutzis wrote in an excellent piece of an analysis for Ekathimerini, there’s something perverse about the whole concept of measuring success based on revenue, rather than reforms. After all, to some extent, Greece’s economic performance is out of its hands.
The bigger picture, though, is that this is the first time Angela Merkel has specifically talked debt forgiveness like this, and as Bloomberg TV’s David Tweed notes, the fact that she told it to Bild (the popular conservative tabloid) is a signal of her seriousness.
Bigger picture, there’s definitely been a change of thinking in Europe, ever since the most recent deal that was agreed to exactly a week ago.
Normally we’re used to brief rallies followed by the emergence of sceptics who realise that nothing was accomplished at all, and that it was just window dressing. That’s the playbook. This time has been different. People are realising that the deal itself (which saw a reduction in borrowing costs and a significant extension in its loans) will have a significant burden-reducing effect.