And here we were thinking that a $2 billion successful Bills auction, (not really) backstopped by everyone and the kitchen sink would sound the all clear on the country with the 16% budget deficit. Alas, with the 10 Year still at 350 bps over Bunds nothing at all has changed for Greece. And here comes Deutsche Bank, which has billions at risk among the PIIGS, saying Greece will very likely be forced to protect its creditors asap, or within the next month, whatever comes first if it has no market access. Alas, as real Greek bonds are still trading just south of 7%, this pretty much means the market doesn't care about the country's long-term prospects, which in our books is equivalent to "absent market access" to anything more than oilve oil and Ouzo. And the cherry on top: several European governments will be forced to have a parliament vote to approve the bail out. It appears the market still has not figured this virtually certain collapse trigger to the rescue package. When it does, the end game for Greece will truly be there.
On Sunday afternoon Euro Area Finance Ministers, the ECB and European Commission finally made some significant progress on a financing package for Greece. We are still lacking some important detail but believe that the announcements represent an important step forward. Most of what was lacking last week, thereby fuelling the market’s sell-off, has been clarified. We have an amount (EUR30bn for the Eurogroup’s contribution), a price (approximately 5%) and a package timeframe (3 years).
The EU authorities continue to state that Greece has not officially requested aid but with discussions to continue tomorrow, with the inclusion of the IMF, we should move closer to a scenario whereby aid can be disbursed in a timely manner if needs be. Discussions of a 3 year programme suggest that the EU authorities now acknowledge that this is a problem which will require more than just a one-off quick fix.
There are still a number of hurdles to overcome and discussions over the coming weeks could prove difficult. At least some Euro Area governments will be forced to hold a parliament vote to approve aid – we cannot exclude that 1 or more votes fail. Are we in for a TARP-style cliff hanger?
Assuming no hiccups, the details of an IMF programme should take 1-2 weeks to agree upon, followed by a further 1-2 weeks for IMF board approval and disbursement of the first tranche. In terms of size, Dominique Strauss-Kahn stated that this will be determined ‘to the extent needed and requested by the Greek authorities’. An EUR15bn stand-by agreement would imply a loan equivalent to 1600% of quota – the largest stand-by agreement since the onset of the crisis has been 1200% of quota (Latvia). This will bring the total package to EUR45bn. Note that the IMF will probably only disburse a maximum of 40% of this upfront. The sovereign will need a minimum of EUR10bn in funding by 19th May. In the absence of market access, Greece will need to activate both IMF and EMU packages within the next month.