A New Greek Deal but Bonds Remain at a Precarious Level
So the deal is done and Greece will finally get its bailout funds.
After a summer of delays, elections, austerity measure after austerity measure and plenty of fierce negotiations, Greece is safe for the foreseeable future.
In the end, the IMF yielded by agreeing to give the country an extra 4% of wiggle room. As a result, the new target for the country is to get their debt down to 124% of GDP by 2020, rather than 120%.
It seems like a drop in the ocean when you consider the wrangling that everyone's had to go through, but at least it's a consensus that makes the troika happy.
Germany will be particularly delighted as they have managed to avoid another big write-down on their Greek debt, as have all the private sector participants.
For Chancellor Merkel, the most important thing is that the Greek can has been kicked beyond next September's German elections.
What happens after then is anyone's guess. With the expected growth trajectory for Greece's economy, there's still a good chance that they will never meet the fiscal consolidation targets without some sort of boost to growth.
Nevertheless, they have made a concerted effort to reform and now have a real chance of making their membership work.
One thing is certain; for the time being, the political will is unshakable. In the years to come, should Greece veer off course again, it will be yet another test of the political will power.
So, as the focus shifts away from Greece, it is likely to head back towards Spain. Expectations remain that it is only a matter of time before they make a formal request for funds.
The yield on their 10 year government debt has remained below the 6% mark for now, but it remains at a precarious level.
If we were to see a bailout, this would really rein the yields in. This is what spread trading investors
are hoping for and is the main reason why the yield hasn't spiked back above the 6% mark.
The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.
By Simon Denham, 27 November 2012