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The Greek government have difficulties to convince the opposition parties
Thu, Jun 9 2011, 07:35 GMT
by KBC Market Research Desk - KBC Bank | View company's profile
On Wednesday, global core bonds had a strong session which ended with good gains in both the US and German markets on the back of the sober out-look for the US economy and expectations that the Fed will stay put even longer than expected before the Bernanke speech late on Tuesday. In EMU, the letter of Schaeuble re-opening the debate on the involvement of private creditors in a second Greek rescue package drove peripheral spreads much wider, giving some underlying support for core bonds (even if the timing again didnt corroborate). Simi-larly, the Fitch warning about the AAA rating of the US and Fed Bullards comments on the debt ceiling, both intrinsically US Treasury negative, were ignored. The correlation of equities was completely away and there was a decline ahead of the US 10-year T-Note auction, which is often seen. It would be a long stretch to invoke the slightly disappointing German production data as a factor explaining the bond rally that essentially took place during the US session. So concluding, we suspect that the positive general bond sentiment backed by recent weak eco data and hopes that central bankers will keep their policy very accommodative for very long drove the price action.
Peripheral yield spreads versus German bonds widened sharply yesterday on German FM Schäuble’s comments in a letter to EU officials (including ECB Trichet). In the letter, if confirmed, Schäuble demands “a quantified and substantial contribution” by private creditors as a condition for German support for a new bailout package.” More specifically he proposed that bondholders should wait seven years for the repayment of their debt by offering them a bond swap. This proposal goes against the wishes of the ECB as it would most likely be considered as a default by the rating agencies. The ECB threatened earlier that it would stop accepting Greek bonds as collateral if rating agencies would give them the “default” mark. The letter highlights the ongoing differences between the different parties around the negotiation table for a second Greek bailout. Recently, there had been hints that the ECB was prepared to endorse a deal in which investors would voluntary ex-change their holdings of Greek bonds for those of longer maturities, which was reflected by narrowing yield spreads. As it now appears that Schauble puts a private creditor involvement in a Greek debt restructuring back on the table, an agreement on the financing of Greece seems further away and yield spreads widened again. The German/Greek 2-year spread increased 127 bps for example.
Additional negative news for Greece came from the national front. Firstly, the Greek government have difficulties to convince the opposition parties and dissenters in its own party on the necessary austerity, conditional to a second financial aid programme. This was stressed out once again by EU finance ministers during a conference call yesterday. Secondly, a Greek government spokesman indicated that the parliament would only vote on the MTFS and privatisation plans on June 28, after the June 20 Eurogroup meeting and the June 23-24 Head of States. If true, it would either delay a decision on a new Greek package or pledge additional funds conditional on parliamentary approval of the MTFS. Thirdly, the Greek unemploy-ment rate exceeded 16% in March, extending a national record high as the nations economy suffers from all austerity measures imposed by PM Papandreous govern-ment to solve Greeces solvency problem. The worse eco data also add to the social tensions in Greece. For today, the ECB meeting (see our KBC flash report) is a negative for peripheral bonds as the ECB will hint at a new rate hike in July. Several peripheral countries have mortgage rates linked to short term rates and are thus very sensible to higher ECB rates. The press conference afterwards will also be worth watching as the press will be very curious for an update on the ECBs stance on the Greek saga
Thu, Jun 9 2011, 07:35 GMTby KBC Market Research Desk - KBC Bank | View company's profile
On Wednesday, global core bonds had a strong session which ended with good gains in both the US and German markets on the back of the sober out-look for the US economy and expectations that the Fed will stay put even longer than expected before the Bernanke speech late on Tuesday. In EMU, the letter of Schaeuble re-opening the debate on the involvement of private creditors in a second Greek rescue package drove peripheral spreads much wider, giving some underlying support for core bonds (even if the timing again didnt corroborate). Simi-larly, the Fitch warning about the AAA rating of the US and Fed Bullards comments on the debt ceiling, both intrinsically US Treasury negative, were ignored. The correlation of equities was completely away and there was a decline ahead of the US 10-year T-Note auction, which is often seen. It would be a long stretch to invoke the slightly disappointing German production data as a factor explaining the bond rally that essentially took place during the US session. So concluding, we suspect that the positive general bond sentiment backed by recent weak eco data and hopes that central bankers will keep their policy very accommodative for very long drove the price action.
Peripheral yield spreads versus German bonds widened sharply yesterday on German FM Schäuble’s comments in a letter to EU officials (including ECB Trichet). In the letter, if confirmed, Schäuble demands “a quantified and substantial contribution” by private creditors as a condition for German support for a new bailout package.” More specifically he proposed that bondholders should wait seven years for the repayment of their debt by offering them a bond swap. This proposal goes against the wishes of the ECB as it would most likely be considered as a default by the rating agencies. The ECB threatened earlier that it would stop accepting Greek bonds as collateral if rating agencies would give them the “default” mark. The letter highlights the ongoing differences between the different parties around the negotiation table for a second Greek bailout. Recently, there had been hints that the ECB was prepared to endorse a deal in which investors would voluntary ex-change their holdings of Greek bonds for those of longer maturities, which was reflected by narrowing yield spreads. As it now appears that Schauble puts a private creditor involvement in a Greek debt restructuring back on the table, an agreement on the financing of Greece seems further away and yield spreads widened again. The German/Greek 2-year spread increased 127 bps for example.
Additional negative news for Greece came from the national front. Firstly, the Greek government have difficulties to convince the opposition parties and dissenters in its own party on the necessary austerity, conditional to a second financial aid programme. This was stressed out once again by EU finance ministers during a conference call yesterday. Secondly, a Greek government spokesman indicated that the parliament would only vote on the MTFS and privatisation plans on June 28, after the June 20 Eurogroup meeting and the June 23-24 Head of States. If true, it would either delay a decision on a new Greek package or pledge additional funds conditional on parliamentary approval of the MTFS. Thirdly, the Greek unemploy-ment rate exceeded 16% in March, extending a national record high as the nations economy suffers from all austerity measures imposed by PM Papandreous govern-ment to solve Greeces solvency problem. The worse eco data also add to the social tensions in Greece. For today, the ECB meeting (see our KBC flash report) is a negative for peripheral bonds as the ECB will hint at a new rate hike in July. Several peripheral countries have mortgage rates linked to short term rates and are thus very sensible to higher ECB rates. The press conference afterwards will also be worth watching as the press will be very curious for an update on the ECBs stance on the Greek saga
