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There was a certain inevitability that a week marked by volatility should end with a session riddled with rumour and wild spread movements. And it was little surprise that Greece was again the culprit. A docile start to the day – positive sentiment was lingering from ECB President Trichet’s intervention yesterday – soon proved deceptive as Greece’s spreads widened to 470bp, matching the record wides of yesterday. Trichet’s declaration that “default was not an issue” for Greece only served to whet the appetite of investors keen to see the bailout become a reality.
If this afternoon’s speculation turns out to be true then they may get their wish. Reports that appear to originate from a note issued by Medley Global Advisors, a New York-based provider of macro analysis, stated that EU officials have agreed on terms for funding a backstop deal for Greece. The funding will be provided at rates “well below those prevailing in the markets”. This last point is crucial. Germany has been adamantly opposed to “subsidised” rates, a possible contravention of its constitutional commitment to the euro just one of its objections. How they have overcome this obstacle – if indeed they have – remains to be seen.
Greece’s spreads rallied sharply after the news, hitting 395bp. But there was another unexpected turn of events this afternoon. Fitch downgraded Greece two notches to BBB- and left it on negative outlook, citing the “ongoing uncertainties about the government’s financing strategies in the context of increased capital market volatility”. Fitch has been more aggressive on Greece throughout the crisis than its rivals S&P and Moody’s, which rate the sovereign as BBB+/A2.
Maintaining an investment grade rating is obviously important given the collateral requirements of the ECB, and Greece’s spreads duly widened 30bp to 425bp after the announcement. But they recovered their poise to end the day about 20bp tighter at 420bp. It should be noted that this is still well into junk territory (an implied rating of single B, according to Markit data).
Some investors appear convinced by the reports of an impending bailout. But we have been here before. Hopes have been quashed on several occasions, the EU preferring to procrastinate rather than take decisive action. The agreement announced last month requires Greece to ask for assistance before it can be given. They may well do this given their plans to raise money in t-bills next week. But the “impending bailout” could turn out to be just another declaration of support, with no actual funds being offered. The outcome will no doubt cause another bout of volatility next week.
Spreads in the other peripheral eurozone countries have proved relatively immune to the turmoil enveloping Greece. This marks a contrast with the events of February, when contagion was the word on everyone’s lips. The chart above shows how Ireland’s curve flattened out and Portugal’s curve inverted in response to fears of a eurozone debt crisis. This week we have little evidence of the same movements, with both Portugal’s and Ireland’s curves staying roughly the same shape. Greece ’s curve has inverted sharply, as it did in February, underlining how investors are now seeing Greece as a distinct case. The corporate market has also been relatively nonplussed by the Greece saga, though it did tighten today following the bailout rumour.
Markit’s Gavan Nolan wrote this CDS report
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