Market commentary: Greece, Greece, Greece

On Wednesday markets experienced quite a mixed session, with European markets mainly in the red and investors focusing their attention to the European Finance Ministers meeting aimed at attempting an early overall compromise between Greece and its international creditors.

The US markets also recorded a low volatility trading day, with both the DJIA and the S&P 500 closing flat on the day, and the Nasdaq posting only marginal gains. In contrast, Asian markets ended mostly in the green with the Nikkei 225 adding 1.85% and both Shanghai and Hong Kong gaining 0.50% and 0.36% respectively.

Yesterday evening was marked by the announcement by European officials that the closely watched European Finance Ministers meeting did not managed to bridge the gap between the attending parties and that no agreement was reached between Greece and the rest of the Euro members, especially Germany.

While Greece confirmed that it does not intend to accept the next tranche of the ongoing rescue package, a decision that puts the country in a very precarious position liquidity wise. The current loan tranche is due to expire at the end of the month, and without an agreement Greece will be virtually running out of cash by the end of March.

Yesterday the country was able to issue short-term three-month notes at an increasing yield of 2.5%, reinforcing the idea that the Greeks are desperately in need of fresh funds to avoid defaulting and exit the Euro currency.

The newly elected anti-austerity government, who forced its hand, approaching Greece’s international creditors with somewhat extreme requests, demanding a substantial nominal debt write-down, while expecting a new, almost unconditional, bridge loan until a permanent solution would be negotiate, had to quickly make a U-turn after facing stone wall responses from Germany, France and the ECB.

Greece has indeed given up the initial idea of imposing a debt haircut, and it is now proposing to restructure its debt replacing the current bonds with securities linked to the country’s future growth, which would allow Greece to defer interest payments in the hope to bring its economy back from a multi-year recession spiral.

This more reasonable approach has not yet won over enough consensus among other European member states and with Germany adopting a hard line, it seems that negotiations are somewhat stalling and putting additional pressure on Greece and its banking system.

In addition, starting today, the Greek Government Bonds will no longer be eligible as collateral for ECB’s refinancing facilities, and therefore Greek banks will have to rely on their own Central Bank’s Emergency Liquidity Assistance facility, which could also be revoke by a vote of the ECB Governing Council.

The still fluid developing situation sees analysts to believe that the entire problem is moving away from being predominately a market risk issue, towards becoming a political risk issue: what will happen to other peripheral countries if Greece does not manage to reach a new bailout agreement and it is forced to leave the Euro? In other words, if Greece does exit the Euro, would other countries such as Italy, Spain or Portugal put in power Anti-Euro parties that will lead to them eventually leaving the Euro as well?

With these questions in mind, and awaiting the Euro Summit due next week, investors do not seems to be scared away from European equities, pushing all European markets posting gains in today early trading.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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