- Virginie Maisonneuve

26 July 2011: A new bail-out for Greece: relief but no end to the crisis

European leaders have thrashed out a deal to bring the sovereign debt crisis in the Eurozone back from the brink. A new bail-out of Greece, worth €109bn, has been agreed....

Virginie Maisonneuve
Head of Global and International Equities


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    Should investors welcome the outcome?

    The market’s initial reaction is one of relief that Europe has, on the edge of the abyss, finally come together and that the situation is moving forward. While questions remain, just ten days ago, there was absolutely no confidence that any of this would happen at all.

    One way to look at the most recent package is to see it as a deal between the private sector, namely the German and French banks, and the European governments. The banks have accepted a 20% haircut on their debt holding in exchange for what are essentially a guarantee or swap and longer maturity. In opting for a selective default on Greek bonds, thereby avoiding a messier situation, the deal will minimise the impact on banks’ tier one capital. That is helpful in two ways. First, given the levels of some sovereign debt it is essential to find a solution that brings private sector capital into play. Second, the package represents a step, albeit small, towards economic “reality”. In other words, while the new measures are not giving investors a market clearing price on their investments, it allows them to get a discounted payment on their investment, and is a partial debt restructuring. This is a better reflection of the current economic reality than other options put forward in the past.

    However, there remain many unanswered questions. The European Commission has made it very clear that what they’ve done extends to Greece only – except the extension of maturity of the loans. One might suspect that if things get really difficult again, people will see the 20% haircut as a benchmark for Portugal and Ireland and then possibly Italy and Spain.

    Speaking more broadly, this deal has occurred as the impact on global GDP of component shortages from the Japanese earthquake has started to ease. The relief rally from the Eurozone deal should therefore coincide with an improvement in global output. If the crucial issue of the US debt ceiling gets resolved, a revival in global sentiment will point to a stronger second half of the year. With corporate cashflows in good health, the outlook for some sectors such as industrials, materials and energy, is especially encouraging given where equity prices are on a 12 to 18 months basis.


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     Source: IFAWorld – Schroders

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