Friday’s agreement by eurozone leaders has been seen as a significant beat over expectations, according to analysts at Morgan Stanley and Societe Generale.
The results were:
- Cuts in the interest rate for Greece’s bailout bonds, and lengthening of their repayment period
- An increase in the size of the EFSF, the region’s bailout fund, to €440 billion
- Agreement on the EFSF’s ability to buy government debt in the primary market
- The ESM, which will replace the EFSF in 2013, will be increased to €500 billion in size
- The “pact for competitiveness” will happen, but will be weakened and called the “pact for the euro”
- The Irish still don’t get new bailout terms because they won’t give up their low tax rate
Why is this impressive? In the build up to the meeting, it looked like we would get nothing on the “pact for competitiveness,” and that Greece would struggle to persuade German Chancellor Angela Merkel to ease their bailout terms.
But the big story may be the EFSF’s ability to buy in the primary market. It was presumed this would be a “red line” for Merkel, according to Elga Bartsch and Daniel Antonucci of Morgan Stanley. But, instead, Merkel viewed it as “no big deal,” as the purchases are limited to those states already being supported by the EFSF, specifically Ireland and Greece.
But Societe Generale’s Michala Marcussen isn’t that impressed:
Market attention is likely to centre of the precise modalities of EFSF and ESM intervention in primary debt markets. In our opinion, the initiative is likely to disappoint as it (1) still comes with conditionality under a macro-economic adjustment process and thus cannot be used to take “pre-emptive” action, (2) while it may help to lower yields in primary markets, it is unlikely to aid secondary markets and investors may demand a premium as a result, and (3) private creditors’ claims will be subordinate to those of the ESM. As such, private creditors may worry they are implicitly buying subordinate debt.
So, for it may be “no big deal” for Merkel, but that’s likely because it’s no big deal in the first place.
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