The news is full of headlines about Greece’s bail-out. Many terms of the deal exceed expectations. Most of the surprise is positive:
- The news that there will be permanent EU monitors in Greece is a strong positive.
- It is positive that the funding will be held in escrow until Greece has proven its responsibility.
- The fact that rates on official loans will be cut below market levels is a big positive.
- Reports that the ECB will return profits from Greek bond purchases to national central banks, to recycle into the Greek rescue plan is also welcome.
- The only major concern is that private bondholders have been pushed to take further losses on face value, and lower coupon rates. This raises questions as to whether there will be sufficient participation by private bond holders. So, we can understand why Greece legislators are pushing through a collective action clause to force take-up. This increases the chance of the CDS being triggered, but such an event is probably manageable.
At another level, this restructuring agreement represents a massive step forward in financial history, showing the increasing commitment of investors to participate as responsible stakeholders in mutually beneficial economic solutions.
The market reaction is subdued. This is not surprising as the event was largely priced-in. We could argue that these surprise moves are positive on aggregate, but it looks as though the market will unsurprisingly wait for execution. The bond restructuring will be launched very soon, and there are several layers of political approval required before we can say implementation in underway.
For now we would argue this is good news, even if there remain substantial long-term execution risks. We are looking for the risk-on rally to resume in the near future.
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