EU rescue deal provides relief

Investors in Greek stocks and bonds yesterday welcomed the news that eurozone ministers had agreed on a possible deal worth up to 45 billion euros to help Greece meet borrowing requirements, lowering the risk of the country defaulting on its loans. However, a disagreement between the European Commission and Germany cast a fresh shadow over how the plan would be activated. The difference in yield, or spread, between Greek 10-year bonds and German Bunds narrowed 63 basis points to 335 bps after jumping last week to as much as 463 bps on uncertainty over how a rescue plan could help Greece lower its funding costs. Credit default swaps on Greek sovereign debt tumbled 69 bps yesterday to 357 basis points, according to CMA DataVision prices. Heavily battered bank stocks, which have lost more than 40 percent in the last six months, continued Friday’s rebound, adding 5.6 percent. «The package provides a funding structure and should temper the default scenario through the end of 2010,» Tom Fitzpatrick, chief technical analyst at Citigroup in New York, told Bloomberg. «In the near-term perspective, the market has the bit between its teeth and to go against this move is not the right way to go.» Eurozone finance ministers agreed on Sunday to a 30-billion-euro package of three-year loans at an interest rate of about 5 percent, if Greece requests help, with the International Monetary Fund expected to supply a further 15 billion euros in the first year. The deal, which would be worth 45 billion euros in the first of three years, with more to be negotiated later, could amount to the biggest multilateral financial rescue ever attempted, dwarfing past IMF programs for Mexico and Argentina. The existence of a detailed standby plan, even if Greece has not decided to invoke it, should help Athens auction a planned 1.2 billion euros in T-bills today. According to Finance Ministry sources cited by Reuters yesterday, Greece will stage a road show in the United States at the end of April to promote dollar-denominated bonds. However, a disagreement between Germany and the European Commission yesterday over how financial aid should be provided to Greece may delay or complicate Athens’s access to the funds if not resolved quickly. Berlin said that EU leaders would have to meet at a summit to decide the issue but the European Commission says that this is not the case. »No. We do not have to organize a big summit here in Brussels. As you saw yesterday, the Eurogroup can activate itself in a very quick, effective… way,» said European Commission spokesman Amadeu Tardio. Deflation may hold the key, says IMF Deflation is the only way Greece can effectively tackle its debt problems, International Monetary Fund (IMF) managing director Dominique Strauss-Kahn said yesterday. «The only effective remedy that remains is deflation,» Strauss-Kahn told Austrian magazine Profil in an interview. «And this is exactly what the European Commission has correctly recommended.» Deflation occurs when the annual inflation rate falls below zero percent. This results in an increase in the real value of money and allows consumers to buy more goods for the same amount of money. Meanwhile, ratings agency Fitch, which last week lowered Greece’s credit grade to the same level as Bulgaria, said it is concerned the country will continue to struggle to rein in its budget deficit even after it has received European Union support. EU governments haven’t clarified how they are going to deliver the aid to Greece, Fitch analyst Paul Rawkins said. «We still have concerns about the prospects of sustaining fiscal consolidation,» Rawkins said. «It doesn’t change the [downgrade] we took.»

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