IFR Comment: Delaying the inevitable for Greece
When we add up all the recent comments and press reports the picture we have is a desire to delay Greece becoming an issue for the markets anytime soon. The likely hope is that enough will be done to delay more difficult questions until after the German election in September when eurozone policy makers will have to face up to an OSI.
Greece will get its next €8.1bn tranche but it won’t be in one go and will come with conditionality and if there are any shortfalls then it is up to Greece to make up for these via increased t-bill sales.
The whole process remains one where the lifeline for Greece continues to be extended even as everyone seems aware that it will not be long enough. To help Greece meet its conditionality the Troika will even allow Greece to reduce privatisation targets by €1bn.
Once the German elections are out of the way then we should expect to see attention turn to the need for an OSI. The ECB seems to be aware of the risks which would explain why it left Greece with a funding shortfall after eurozone central banks failed to rollover maturing Greek debt to the tune of €3.7bn.
Remember that the rollovers were agreed as part of the Greek bailout which also involved a further EUR1.9bn of rollovers by NCBs in 2015-16.
The IMF has told us that there is a funding gap of €4.6bn for 2014 and €6.5bn in 2015 so eurozone policy makers cannot delay until mid-2014.
Expect to see attention for an OSI before year-end but it might be early next year before we get an actual OSI.
Had it not been for Fed tapering the sentiment on GGBs might have been a little better but with market risk taking in hibernation and bund yields correlating with Treasuries we have had the best of the gains for GGBs.
They are performing well today (spread on 10s down 18bp) but until the market gets comfortable with the post-Fed tapering landscape we are biased toward staying neutral on GGBs currently.