Market trades in on Greek deal expectations
So Angela Merkel and Nicolas Sarkozy’s Wednesday-into-Thursday meeting has resulted in a joint Franco-German position on the second Greek bailout, including the private sector element. They’ve ditched the bank tax that had gained so much momentum over the past few days – largely because it was the only option that didn’t lead to selective default. That always struck me and everyone else as a political play anyway.
The banks had immediately thrown their collective hands in the air in horror (except the heavily exposed French banks who quite liked the idea of indiscriminate industry burden-sharing), threatening legal action. In all honesty, it would have taken so long to get all the countries to alter their tax legislation that it was always a non-starter in my view.
Keith Mullin, Editor at Large, International Financing Review
What the agreed position is we don’t know, but you have to assume they’ve put their support behind something already in the menu of options currently on the table or a derivative of one of the options: the French rollover plan, the German exchange plan, or adding to EFSF firepower and giving it the authority to engage in secondary market debt buybacks and lend pre-emptively to countries that run the risk of falling into trouble.
However, the Germans have been firmly opposed to changing the EFSF’s statutes, so unless they’ve changed their mind, that leaves only the existing French or German proposals.
The big question is whether they’ve got their heads around the selective default issue (which I’ve been arguing for ages should be seen for the red herring that it is). Jean-Claude Trichet attended some of the bilateral meeting last night, no doubt to discuss the issue of SD and the ECB’s position on accepting Greek debt as collateral in its liquidity operations.
The market this morning was already discounting a deal being announced at the end of the Summit, which kicks off at midday London time. This is potentially a dangerous move that could over-reverse if a clean proposal doesn’t emerge – there is speculation that an announcement could be out by 16.00 London time. Peripheral spreads were a touch firmer in early trading this morning; 10-year Spain and Italy bonds tightened by around 8bp to Germany, while two-year Greece was quoted 300bp tighter (although there has long since ceased to be any trading at this point in the curve; it’s all indicative dealer screen prices).
In the midst of all of this intense waiting, Spain is selling €1.75bn to €2.75bn of 10 and 15-year Bonos. I suspect end-buyers will sit on the sidelines for this, leaving the dealer community to make or break the auction. That said, there is likely to be some cashflow-driven buying following redemptions on Monday and ahead of repayments at the end of the month.
If the communiqué we’re expecting later this afternoon is vague or infers another holding period to hammer out broad agreement, the market is likely to react badly. If, on the other hand, it suggests there’s broad agreement but will take time to finalise the technical details, the market should accept that and hold fire. The pressure on the meeting to come up with something substantive is extreme, underlined by Barack Obama’s call with Angela Merkel and comments yesterday from EC president Jose Manuel Barroso: “Nobody should be under any illusion: the situation is very serious. It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond”.
Until now, I’ve been pretty cynical about the ability of EU meetings to come up with anything other than hot air and political points-scoring. But I’m going with the flow on this one and (reluctantly) choosing to assume they’ve pulled something out of the hat.
I have my doubts, but we’ll know before too long …