Friday, July 22, 2011

Greece debt crisis: Relief likely to be temporary

by Nils Pratley

July 22, 2011

On the second day, the euphoria faded. The rebound in bank shares came to a halt; the yield on Italian and Spanish debt rose slightly; and investors reflected that the euro leaders, despite their considerable skill in designing a package that tiptoed through a financial minefield, still face huge economic and political challenges. Barclays Capital caught the mood best – the result was "more than expected but not enough to make us sleep soundly".

First, the definite good news. The yield on Greek two-year debt has plunged from 40% to 28%. Clearly, even the lower rate shows Greece is miles away from being able to fund itself in the market. But the danger of an imminent chaotic default has been removed by the eurozone's softer stance on lending. The country will get €109bn (£96bn) of loans at 3.5%, ranging from 15 years to 30 years in length. The banks will volunteer (ie have their arms twisted) to join the relief effort, but not by so much as to trigger worries about holes being ripped in their balance sheets.

The precise sums are hard to determine given the complexity of the volunteering menu but the hit to the private sector could be €50bn for 2011-14, calculate analysts; banks will count that as a good result for themselves.


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