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

- Virginie Maisonneuve

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.

     


    Important Information:

    The views and opinions contained herein are those of Azad Zangana, European economist, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. For professional investors and advisers only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.


     Source: IFAWorld – Schroders

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