Markets have begun digesting Greece’s managed default, with the Hellenic Republic’s new bonds trading at distressed levels.
Attention will now shift to the Iberian Peninsula, where Portugal will probably avoid anything like the Greek restructuring in 2012, while Spain will fail to meet its deficit targets, paradoxically under the auspices of German Chancellor Angela Merkel.
In what has come to be known as the largest sovereign debt restructuring in history, Greece went ahead with its controversial PSI (private sector involvement) deal, achieving a high participation rate above 95% and triggering credit default swaps.
Most of the action appeared to have been priced in, with European equities marginally higher.
Greece’s new bonds started trading on Monday, their yields jumping to distressed levels from the start.
According to the FT, Greece launched a series of 20 bonds with maturities ranging from 11 to 30 years, with prices quoted between 23 and 26.5 cents in the euro.
Yields remained sky-high, with the 11-year at 18.1% and the 30-year around 13.4%; the yield curve remained inverted.
In the U.S., equities were mixed with the Dow and the S&P 500 in positive territory and the Nasdaq in the red. Financials were dragging the indices down, with Bank of America, JPMorgan Chase, and Citigroup all in negative territory. Gold and oil were also down.
With the Greek problem off the table for the very near-term, markets will turn their eyes mainly to Portugal and Spain as the European sovereign debt crisis continues. Portuguese sovereign bonds (PGBs) are still trading at distressed levels, with the spread over German bunds at more than 1,200 basis points.
Portugal is indeed against the ropes. Their economy shrank 1.1% in 2011 and is expected to contract a further 3.7% in 2012 and 2.1% in 2013, according to Barclays.
Gross public debt is about 110% of GDP and the Portuguese primary balance deficit stands at about 6% of GDP; while Portugal might swing into a surplus over the next 4 to 5 years, public debt won’t stabilize in time for the country to access public markets to issue medium and long-term debt as the IMF/EU program stipulates, as funding costs would remain around 6%, according to Barclays.
Still, the analysts forecast that Portugal will not resort to a PSI-like debt restructuring. Portugal is pretty much insolvent, and will accumulate about €147 billion in senior debt held by the Eurosystem, making that debt essentially non-defaultable.
International investors, already wary of peripheral bonds, will face even higher risk from increased public sector support, as the incentive to regain market access is diminished while “credit risk remain[s] elevated in part due to low recovery in the event of default.” Thus, Portugal won’t be able to finance itself.
The analysts suggest European policymakers will avoid a Portuguese PSI, though. Contagion remains a major issue.
After the Greek default, which has repeatedly been framed as unique by the likes of German Chancellor Merkel and Finance Minister Schauble, Europe must assure markets that other distressed sovereigns, particularly Spain and Italy, won’t default on their debts.
Additionally, “euro area leaders have also strongly indicated that ‘so long as a programme [sic] country remains committed, the euro area will continue providing financial support,’” according to Barclays.
“If the Portuguese government continues to implement the programme [sic] satisfactorily, even if the fiscal and growth performance are weaker than expected, core euro zone countries will likely find it easier to explain continued support for Portugal to domestic constituencies,” they conclude.
This takes us to the issue of Spain, which announced it would be missing its 2012 deficit target of 3% of GDP. Prime Minister Mariano Rajoy faced the EU Commission on Monday, as heads of state met in Brussels to approve the second Greek bailout and determine steps to come.
forbes.com
Attention will now shift to the Iberian Peninsula, where Portugal will probably avoid anything like the Greek restructuring in 2012, while Spain will fail to meet its deficit targets, paradoxically under the auspices of German Chancellor Angela Merkel.
In what has come to be known as the largest sovereign debt restructuring in history, Greece went ahead with its controversial PSI (private sector involvement) deal, achieving a high participation rate above 95% and triggering credit default swaps.
Most of the action appeared to have been priced in, with European equities marginally higher.
Greece’s new bonds started trading on Monday, their yields jumping to distressed levels from the start.
According to the FT, Greece launched a series of 20 bonds with maturities ranging from 11 to 30 years, with prices quoted between 23 and 26.5 cents in the euro.
Yields remained sky-high, with the 11-year at 18.1% and the 30-year around 13.4%; the yield curve remained inverted.
In the U.S., equities were mixed with the Dow and the S&P 500 in positive territory and the Nasdaq in the red. Financials were dragging the indices down, with Bank of America, JPMorgan Chase, and Citigroup all in negative territory. Gold and oil were also down.
With the Greek problem off the table for the very near-term, markets will turn their eyes mainly to Portugal and Spain as the European sovereign debt crisis continues. Portuguese sovereign bonds (PGBs) are still trading at distressed levels, with the spread over German bunds at more than 1,200 basis points.
Portugal is indeed against the ropes. Their economy shrank 1.1% in 2011 and is expected to contract a further 3.7% in 2012 and 2.1% in 2013, according to Barclays.
Gross public debt is about 110% of GDP and the Portuguese primary balance deficit stands at about 6% of GDP; while Portugal might swing into a surplus over the next 4 to 5 years, public debt won’t stabilize in time for the country to access public markets to issue medium and long-term debt as the IMF/EU program stipulates, as funding costs would remain around 6%, according to Barclays.
Still, the analysts forecast that Portugal will not resort to a PSI-like debt restructuring. Portugal is pretty much insolvent, and will accumulate about €147 billion in senior debt held by the Eurosystem, making that debt essentially non-defaultable.
International investors, already wary of peripheral bonds, will face even higher risk from increased public sector support, as the incentive to regain market access is diminished while “credit risk remain[s] elevated in part due to low recovery in the event of default.” Thus, Portugal won’t be able to finance itself.
The analysts suggest European policymakers will avoid a Portuguese PSI, though. Contagion remains a major issue.
After the Greek default, which has repeatedly been framed as unique by the likes of German Chancellor Merkel and Finance Minister Schauble, Europe must assure markets that other distressed sovereigns, particularly Spain and Italy, won’t default on their debts.
Additionally, “euro area leaders have also strongly indicated that ‘so long as a programme [sic] country remains committed, the euro area will continue providing financial support,’” according to Barclays.
“If the Portuguese government continues to implement the programme [sic] satisfactorily, even if the fiscal and growth performance are weaker than expected, core euro zone countries will likely find it easier to explain continued support for Portugal to domestic constituencies,” they conclude.
This takes us to the issue of Spain, which announced it would be missing its 2012 deficit target of 3% of GDP. Prime Minister Mariano Rajoy faced the EU Commission on Monday, as heads of state met in Brussels to approve the second Greek bailout and determine steps to come.
forbes.com
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