Taking A Look at Greece - Sidstone, Gray & Partners Market Outlook

The Greek situation remains in the eye of the storm, and has led to the decision
to downgrade its debt to â junkâ status despite a formal request for aid from the IMF a
d other member countries of the euro-zone to enable it to refinance its maturing
debt and avoid a default. It is clear that the contagion is spreading to other
members of the euro-zone, and so investors have continued to switch funds from t
he bond markets of the weaker countries and this has provided further support fo
r the stronger markets. A significant development has been the strength of the U
S market.
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The latest developments in Greece have shown that the warning is fully justified
. Sovereign debt defaults may still occur, and the single currency system in Eur
ope may not survive in its present form.
If the Greek authorities can implement the austerity measures that are being dem
anded before any loans are granted, then the threat of default on Greek bonds ma
y be reduced, and there will be more time for other countries that are in simila
r difficulties, Portugal, Spain, Ireland, and even Italy, to take corrective act
ion. But the situation clearly remains extremely uncertain, and this has persuad
ed investors to take evasive action, and to push yield spreads between stronger
and weaker bonds to record levels. It was only after considerable hesitation tha
t the Greek government made the formal request for aid. It was clearly concerned
that the social unrest that has already occurred in the country would make it e
xtremely difficult to implement even more extreme austerity measures; but in the
end it had no choice. The request has produced a provisional agreement for the
IMF to provide â ¬15 billion in loans, and for the other member countries of the euro-
zone to provide â ¬30 billion, with the amounts varying according to the respective si
ze of the lending country.
Taking A Look at Greece - Sidstone, Gray & Partners Market Outlook - The odds st
ill seem to favour a successful completion of the loan agreement; but each count
ry has still to obtain the necessary parliamentary approvals, and this is produc
ing particular difficulties in Germany. In order to secure the necessary approva
ls, the German government is insisting that the Greek government produced detail
ed proposals to meet the budget deficit reductions that are required for 2011 an
d 2012, as well as for the current year, before it can qualify for the loans. Th
is is not likely to be an easy task; but all the parties are aware of the possib
le consequences of failure, and so some kind of â fudgedâ agreement seems inevitable. Th
s may provide a short-term respite in the markets; but the overall prospects rem
ain unattractive. The gilt edged market has remained relatively stable over the
past month, despite the uncertain situation in the UK. There has been evidence o
f a further modest improvement in the economic background, and the Bank of Engla
nd is holding short-term interest rates at low levels. But the UK also has very
serious fiscal problems, and there are doubts whether the new government formed
after the forthcoming general election will be able to cope adequately with thos
e problems. It is possible therefore that it has been the disaster in the bond m
arkets in mainland Europe that has been the main reason why the gilt edged marke
t has performed so well. The economy is clearly continuing to benefit from the m
onetary and fiscal policies that were introduced to counter the recession; and s
o although unemployment remains high and the housing market recovery is very fra
gile, the recovery in activity is continuing.
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