EUROPE - Bond rates and currency markets responded strongly to news that euro-zone members agreed a rescue package for Greece over the weekend.
Having hit a high of 7.5% last Thursday and after closing at 7.1% on Friday, yields on Greek 10-year bonds fell more than half a per cent in early trading. Yields on three-year bonds fell even further. Meanwhile, German 10-year yields moved as high as 3.22% before falling back to 3.17% by 14:00 GMT, while the euro swap rate against 6-mth Euribor at 10 years traded up to 3.35% before retrenching to 3.33% by 14:00 GMT, having closed at 3.31% on Friday.
The €30bn of potential financing is in addition to pledges from the International Monetary Fund (IMF), and will be granted on "non-concessional interest rates": variable-rate loans will be based on 3-month Euribor and fixed-rate loans will be based upon Euribor swap rates; a charge of 300 basis points will be applied on loans out to three years, and a further 100 basis points for amounts outstanding for more than three years; a one-off service fee of up to 50 basis points will also be charged. The euro swap rate at three years rose as high as 1.89% today, before retracing back to 1.87% by the afternoon. A three-year fixed-rate loan granted to Greece today would therefore carry an interest rate of around 5.4%.
European Commission president José Manuel Barroso welcomed the deal struck on Sunday: "This is a clear and strong commitment: it shows that the euro area is serious in doing what is necessary to secure financial stability," he said, adding: "I am convinced that it will help Greece to continue vigorously correct public finances imbalances and to deliver the necessary structural reforms."
George Papaconstantinou, the Greek finance minister, said he believed the new package would not need to be called upon as it would allow Greece to access sustainable market rates. A €1.2bn auction of three and six-month paper is due today.
Currency traders had already responded positively to rumours on Friday, sending the euro up to from 1.3455 to 1.365 against the US dollar. The rate briefly hit 1.37 today before falling back to around 1.36.
Financial markets research company GaveKal called the package "a game changer" and drew attention to the "non-concessional" rates as a protection against contagion: "The new, theoretical Greek ‘ceiling yield curve' would stand not much lower than that of the average Greek bond market yields of the last three months (thereby ensuring, for now, that other PIGS do not come feed at the same trough)."
But whereas GaveKal welcomed the fact that the agreement "marks the beginning of a three-year programme of work involving the European Commission, the ECB, the IMF and Greece, to closely monitor the fiscal situation in Greece until at least 2012", it warned "it is very clear that Germany will not continue to support the eurozone if the weakest fiscal links - that is the PIGS + France - do not make the necessary steps to cut their public deficit back to 3% of GDP or so by 2012/2013."