By Hugh Dent -
THE euro zone has loaded its rescue gun for Greece with enough bullets to avert debt default at least this year, but the Greek government is still at risk, analysts said yesterday. The rate or yield demanded by the market to lend to Greece fell to 6.498 per cent on the 10-year bond from 7.126 per cent late on Friday. This was far below a record high point above 7.5 per cent on Thursday, and the euro also rose strongly. The chief European economist at Goldman Sachs, Erik Nielsen, picked up a metaphor from Greek Prime Minister George Papandreou last week that the EU had put a gun on the table pointing at speculators. Nielsen said that the gun would be fully loaded only once the IMF had agreed details of its participation and after votes of agreement by the other 15 euro zone members’ parliaments. “For the Greeks to fire the loaded gun, they’ll have to ask the Europeans to activate the loan.” He said he thought “it’ll be late April before the gun gets fired and the first money starts to flow.”
The sudden changes in bond yields and the value of the euro were in response to details of a stand-by rescue agreed on Sunday to re-align market interest rates for Greece in urgent weekend talks between euro zone finance ministers. The agreement completes an offer in principle last month for the European Union and International Monetary Fund to offer Greece help, if asked. That deal left many vital questions unanswered and consequently fund managers turned away from Greek bonds, thereby pushing up the interest rate which Greece must offer to unbearably high levels. The announcement on Sunday plugged many of the gaps, but opened up others, analysts said. It put the amount on offer from the euro zone at 30 billion euros ($41 billion) in the first year of a three-year facility and EU officials said the IMF could contribute a further 15 billion euros. The IMF has yet to confirm this figure.
Analysts warned that the Greek government still faced a Herculean task and must now work hard and fast to enact huge reforms and retrieve credibility, the line taken by Germany from the start and taken up in statements by the Greek government last week. Barclays Capital analysts said the agreement “should calm the markets in the short-term” but warned that the problems in Athens remained “extremely difficult.” Although the details eased the risk of immediate default, the analysts said it was not evident that the German parliament would approve the terms and asked whether the EU-IMF loans if made would rank before other bonds in the event of default.
Many analysts say that the standing of the EU, euro zone and European Central Bank have been damaged by the fact and handling of the Greek crisis, while also observing that a partial default would have been worse. Financial Times commentator Wolfgang Munchau said that although “Greece will not default this year” he thought that “Greece will eventually default.”
At Dutch bank ING, analysts said that now “default risk is not an issue for 2010 at the very least” but in the next three years “Greece will have to continue its efforts to reduce its fiscal deficit”. At BNP Paribas bank in Paris, analysts said the deal removed damaging uncertainty and was “good news for the euro and can help Greek government bond yields to decline significantly.” Analysts have also expressed concern about the standing of the European Central Bank, saying it had made U-turns on a role for the IMF, and on easy terms for loans to euro zone banks.