WHAT TO WATCH: Greek Deal Expected Even as IMF Digs in Its Heels
(Bloomberg) -- Greek government bonds could continue to rebound if the nation’s creditors agree on a deal in the weeks ahead, if not at today’s Eurogroup meeting, analysts say.
- Agreement could pave the way for GGBs to become eligible for ECB QE and spur a rally; on the flip side, there are still areas of contention between the govt, the IMF and the EU that could trigger market volatility, analysts say
- NOTE: Euro area finance ministers are due to discuss Greece in Brussels this afternoon from 2pm London time
- WHAT ARE THE STICKING POINTS?
- While the IMF wants Greece to put in place EU3.6b of contingency fiscal measures, the country’s authorities say this would be unconstitutional
- The fund and the EU disagree about what impact the current measures will have on Greece’s primary surplus by 2018, with the IMF reportedly calling for the target to be lowered to 1.5% from 3.5%, which would imply a higher level of debt restructuring
- German Economy Minister Sigmar Gabriel says further austerity in the country would stanch country’s economic growth
- While Germany remains opposed to a Greek debt haircut, there is a readiness to discuss debt-relief measures, spokesperson Steffen Seibert says
WHAT’S THE LATEST?
- Greek lawmakers approved govt’s pension and income-tax reform bill with majority of 153 votes in country’s 300-seat chamber, according to parliament speaker
- A new MOU pact has been drawn up ahead of discussions, which paves the way for new austerity measures equal to as much as 2% of GDP, in the event Greece missed its surplus targets
- Technical tools, including interest rates and schedule, may be studied to help reduce burden of Greek debt, EU Economy Commissioner Pierre Moscovici said Sunday on BFM TV, a French channel.
- IMF Director Christine Lagarde says the fund won’t join a European bailout of Greece until differences with the European creditors are resolved
WHAT’S THE LIKELY OUTCOME?
- No deal is expected today, but the target is still the Eurogroup on May 24, RBC analysts say
- JPMorgan analysts Marco Protopapa and Aditya Chordia expect changes in debt maturity and interest rates, helping to improve debt sustainability; may still need debt relief again in the future but expect that to be forthcoming
- Athanasios Vamvakidis, strategist at BofA Merrill Lynch, expects a deal before the July payment to the ECB falls due
- RBS analysts say parties will be aware of the risk that headlines on Greece risk interfering with the Brexit vote, so any decision could be delayed until July
- But Commerzbank analysts think the EU will be incentivized to avert any escalation of the Greek issue given the migrant crisis and U.K. referendum vote
- They do, however, think there’s a risk the IMF won’t participate in the third rescue package, a view echoed by SocGen analysts
WHAT DOES IT MEAN FOR MARKETS?
- Greek two-year govt bonds are the worst performers in Europe so far in 2016; the 10-year notes are the second worst, behind Portugal
- Morgan Stanley economists expect the bailout review to be concluded, paving the way for debt re-profiling, ECB QE, lifting of capital controls and economic recovery
- There’s upside potential toward 81 cents on the GGBs if that is the case, strategists at the bank including Robert Tancsa write in note to clients; the 10-year notes are now trading at 71 cents
- Roubini analysts expect rating upgrades from Fitch or Moody’s in next 12 months if Greece gets through first review with some kind of an agreement on debt relief, pushing Greek CDS and sovereign yields lower
- UBS Wealth Management analysts, though, recommend selling into any rally in GGBs after a deal and ECB QE inclusion
- Eurasia’s Mujtaba Rahman says the standoff between Greece’s creditors over debt relief and the U.K. vote are two potentially significant market issues that aren’t being priced in
- While ECB QE may limit market fears, it may not be able to fully contain them, he says in client note, suggesting there could be some market volatility ahead
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 1004Z GA (Hellenic Republic)
13347Z US (International Monetary Fund)
People Aditya Chordia (JPMorgan Chase & Co)
Athanasios Vamvakidis (Merrill Lynch International)
Christine Lagarde (International Monetary Fund)
Marco Protopapa (JP Morgan Securities LLC)
Mujtaba Rahman (Eurasia Group)
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