We could say the markets are, for now at least, happy with the European leaders pretending there is there is an agreement in principle on a bailout of Greece, while in reality — there no agreement at all.
Let me explain.
The markets don’t seem to be taking seriously the fact that not only Germany, but also the Netherlands, Italy and Finland insist on including the IMF in any rescue action. Meanwhile, the majority of EU countries — led by France — reject such a move.
In my opinion, that doesn’t look like an agreement at all.
Germany is also much more cautious with respect to any agreement on granting Greece loans, if needed.
German Chancellor Angela Merkel and the German Minister of Finance Wolfgang Schäuble argue that such a credit pool might be in conflict with the bailout rule and that the German constitutional court could intervene.
This is the main reason why this agreement contains the sentence that any emergency aid has to be in line with the EU Treaty and with national law.
“The proposals would be fully consistent with the Treaty framework and national law and would provide strong incentives to return to markets as soon as possible,” the sentence states.
Now, what the markets clearly seem to overlook is that both the EU Treaty, as it is in function today, and national law explicitly rule out a bailout.
As always, the devil is in the details. I agree it’s complicated.
So let’s keep it simple. That means Germany can only support a bailout when it’s really not a bailout.
Let’s now wait until the markets figure that out.
Meanwhile, ratings agency Standard & Poor’s states that “despite the new measures, we think it will be difficult for Greece to comply fully with its planned consolidation path, reducing its deficit … if it does not implement additional measures in the coming years.”
In its just released note on Greece whereby S&P confirms Greece at BBB plus and removes it from CreditWatch negative, S&P states that it expects “much weaker medium-term growth than official forecasts, and, consequently, an erosion of the tax base.”
S&P also said that “if the currently high borrowing costs persist …. the large and growing debt burden, which we currently expect to peak at about 133% of GDP in 2012, is likely to increase further. In light of these considerable budgetary challenges and the difficult economic environment, it remains to be seen whether Greece's leaders will demonstrate the political will necessary to achieve fiscal consolidation.”
However, in the markets, the yield on the 10-year Greek bond has now dropped by nine basis points to 6.11 percent and the yield spread over the German 10-year bund has narrowed to 298 basis points. (One basis point is equivalent to 0.01%, or one-hundredth of a percentage point.)
But I can’t find any serious reason why anybody should turn positive on Greece, or the euro zone as a whole, for the moment.
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