Greece – Back in the spotlight?
4th February 2016
Greece has moved away from market participants’ interest in the last few months: however, it does not mean that there are no important issues to tackle. First and foremost, in March the current IMF program expires, and the IMF has not yet disclosed if it will keep on funding the Greek government in the future. The key for this decision is that the IMF believes some debt relief is needed in order to consider Greece debt sustainable. Then, the issue of IMF participation in any future Greek assistance makes the topic of debt relief an urgent issue.
Debt relief would be possible if the Greek government is believed by the Troika (oops…the Institutions…) to fulfil the Assistance program conditions. The pension reform proposed by the Government in the last few weeks is fundamental for this to happen. Such a proposal has not yet received a clear “go ahead” by the Institutions, as it will open the way for passing the first review of the Program, starting discussion of the debt relief and making the IMF involvement possible. In the meantime, financial conditions remain tight and confidence low, as the graph of the evolution of the total deposit in Greece shows.
Total deposit in Greece (Source: Bloomberg)
The base case is that an agreement will be found sooner or later, so that everything may develop according to plan. However, phases of uncertainty and turbulence may not be excluded if a solution is delayed until the very end. Markets, driven by risk aversion since early 2016, have already started to price higher risk in Greek bonds: yields on GBB 2017 more than doubled since November 2015 lows, as shown below.
GGB 3 3/8 07/17/17 Yields (Source: Bloomberg)
Market participants are focusing on inflation, oil price and Central Banks’ monetary policy decisions, but Greece will not be forgotten, and could become an important catalyst for financial markets in the short term.
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