Markets skeptical on Greek plan, citing economic uncertainties lying ahead

As the Greek government prepares to submit to Parliament today a draft bill aimed at achieving fiscal savings of 30 billion euros over the next three years, markets reacted skeptically to the package and the country’s ability to successfully implement tough measures in a recessionary environment. Despite Sunday’s agreement by European finance ministers on an unprecedented loan package totaling 110 billion euros, the euro fell as markets questioned whether Athens will be able to enforce extra austerity measures promised to secure the aid and fretted that other eurozone states may be vulnerable. In contrast to the euphoria that greeted past IMF rescues, Greek bond yields eased only slightly compared to benchmark German Bunds, falling back to levels reached early last week. The debt spreads of Portugal and Spain, seen as the next dominoes to fall if markets are not convinced by the Greek plan, narrowed only modestly. On the local equities market, bank stocks rallied 3.5 percent higher in early session trade, only to end in the red by 1.29 percent. The Athens bourse benchmark general index also ended in the red with investors concerned about the impact the deteriorating economy will have on profit figures. Ratings agency Fitch said yesterday that Greece’s sovereign debt is less risky after the bailout package and that the country could avoid default but stressed the economic uncertainties ahead. «The engagement of the IMF significantly enhances the credibility of efforts to place public finances on a sustainable path and secure the solvency of the Greek state,» according to New York-based Fitch, which has a BBB- rating on Greek debt. «Despite the uncertainties regarding the economic outlook and realization of fiscal targets, solvency is not beyond reach.» According to Greek government estimates, the economy is predicted to contract at an annual rate of 4 percent this year ahead of negative gross domestic product of 2.6 percent in 2011. Greece expects the economy to return to a growth trajectory as of 2012. Eurozone leaders will formally launch the first bailout of a member of the 16-nation single currency area on Friday and aim to secure parliamentary backing for national loan contributions by then. Meanwhile, Greek Deputy Finance Minister Filippos Sachinidis said yesterday that Sunday’s rescue plan will include 10 billion euros in support for Greek banks that could be affected by the country’s expected three-year recession. Sachinidis told state television that the money would be reserved for a «stabilization fund» out of the total 110 billion euros pledged in loans by the eurozone countries and the International Monetary Fund. Boost for banks The European Central Bank (ECB) provided Greece with a major boost yesterday by indefinitely accepting the country’s debt as collateral, even if its credit ratings continue to fall. The ECB’s move to suspend its minimum threshold for Greek debt means the bonds will remain eligible as collateral for loans even if ratings agencies Moody’s and Fitch follow Standard & Poor’s and downgrade Greece’s paper to junk status. This decision, the second change to the ECB’s borrowing rules in less than two months, will guarantee that Greek banks have access to cheap central bank funding. The ECB said in a statement that it was satisfied with Greece’s new savings measures and that suspending the BBB- threshold – which still applies to other debt – was recognition of Greece’s efforts and the coming aid package. The move ensures Greek banks will continue to have access to liquidity even if they cannot access funds on wholesale markets. «They want to make sure that the question of Greek banks [having] access to liquidity will not be an issue in this crisis. It’s one less thing to worry about,» Goldman Sachs economist Dirk Schumacher told Reuters. German Chancellor Angela Merkel said the ECB won’t ease its rules for good on accepting Greek bonds. «The ECB didn’t take the decision lightly and won’t do this forever,» Merkel said.

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