Greek talks stall
21/02/2012
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Eurozone debate continues, but markets move forward
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Strong words from FRance amid German reluctance
The relative strength of recent market performance masked another week of twists and turns in the ongoing Greek saga, which saw the prospect of a ‘disorderly' default by Athens increasing in the minds of many. While the general view is that the second bailout and the terms of private sector involvement would most likely be agreed today, enabling Greece to receive the next round of funding by the 20 March deadline, last week drew people's attention to further hurdles that could arise.
Angela Merkel of Germany, Italy's Mario Monti and Lucas Papademos of Greece held a conference call ahead of the weekend discussing a range of contentious issues. Should private investors take a bigger hit? Should the rest of the eurozone have tighter controls over Greece's fiscal policies? How tight should Greece's austerity measures be? There are still many uncertainties over details but the progress made over the last 4 months has led traders to believe that, somehow, there will be a solution. Francois Fillon, France's prime minister, berated those with doubts over rescuing the Greeks.
"We must do absolutely everything we can to avoid a default in Greece. Now that we have a commitment from the Greek government, the Europeans must now honour their own commitments. Such talk is totally irresponsible."
European leaders have repeatedly warned that there was no guarantee they would reach an agreement, and reports that the German government was split over whether to allow Greece to default would have deeply disturbed markets only a matter of months ago. The markets' sanguine response reflects belief that eurozone finance ministers will choose to rescue Greece rather than rock the fragile global economy further. With the aforementioned American markets soaring, the German and French equity markets also continue to be strong along with Spain and Italy. Nevertheless we still question how, even with a second bailout package agreed, Greece will be able to withstand a prolonged period of austerity (remembering it is already four years into a recession). Without the economic growth Greece and the wider eurozone desperately needs, it is difficult to envisage how the country will return to a path of recovery. The threat of default remains high, with the bigger question occupying commentators and politicians being whether Greece could still remain part of the euro.
Over the past few weeks, the cost of borrowing in the eurozone has also dropped sharply, with AAA-rated euro-denominated corporate bonds falling from an average 3.8% at the beginning of the year to 3.4% now. Sovereign bonds have seen similar drops, with Italian bonds seeing the biggest fall from 6.9% to 5.6%. Some of these changes are hugely significant, and seem to have happened in the blink of an eye.
