It would seem we’re finally about to see the last act of the never-ending Greek debt drama, but even that’s likely wishful thinking, not the least because so many prior deadlines have been moved. This weekend is expected to see the full Greek parliament vote on approving the latest Greek budget needed to obtain the next installment of the second EU/IMF bailout package. (But it may not even be this weekend, as the latest media reports now indicate a vote is due either Sunday or Monday.)
The Greek budget plan presented to EU finance ministers on Thursday was deemed inadequate and the Greeks were told to find an additional EUR 325 mio in cuts, an amount which would seem relatively easy to find. But Greek junior coalition members were already rebelling against the new budget pact and were vowing to make no further sacrifices. At last count, 5 cabinet ministers resigned and with Athens the scene of strikes and riots, we think there is a non-trivial risk that the measure may fail. However, our primary scenario remains that Greece will pass the required austerity budget and secure the needed bailout funding to avoid a default on the EUR 14.5 bio in bonds maturing on March 20.
Monday is also the deadline for Greece to conclude an agreement with private sector investors (PSI) on a debt swap to reduce the overall amount of Greek debt. The latest reports suggest an agreement is likely, but we still have no sense of how great the PSI participation will be, which is the key to determining whether the debt swap is a ‘credit event,’ potentially triggering credit default swap payouts. On Friday, S&P indicated that any Greek imposition of a retroactive ‘collective action clause’ (CAC-allowing a supermajority of bond holders to approve a change in the terms of outstanding bonds) on Greek government debt as part of the PSI deal would constitute a ‘selective default.’ So the risks of a credit event still loom large for European financial markets next week.
If the Greek budget deal is passed, we would expect another relief rally in EUR and other risk assets, though we would not expect it to endure very long, given the serious doubts markets still hold over the longer-term sustainability of Greece. There is significant gap risk over the weekend, in both directions depending on the outcome, if the Greek parliament manages to vote on Sunday. If the vote is stalled into Monday, then we would look for risk to waver until a final vote is held. Wednesday will see the EU finance ministers meet to approve the Greek budget package, and we can no longer expect them to simply rubber stamp whatever the Greeks present, leaving risk in limbo until mid-week at least.
Next page: Signs of a potential risk reversal