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Below we provide the main notes from tonight’s press release of EU Heads of State or Governments of the Eurozone and EU Institutions, including a Q&A, on the terms of Greece’s second bailout package.  To say the least, we’re extremely skeptical of the program providing anything more than another near term band-aid to European sovereign debt contagion. Perhaps the group’s insistence that Greece (and not the other PIIGS) requires an “exceptional and unique solution” was most concerning of all.

Notables:

  • €109 billion of financing for Greece from the EU and IMF and an estimated €37 Billion contribution through VOLUNTARY Private Sector Involvement (PSI) of banks to reduce Greece’s debt through exchanging existing bonds for new bonds with lower interest rates and longer maturities. (unique terms to be drafted)
  • The European Financial Stability Facility (EFSF) is the vehicle for the disbursement of the new €109 billion package
  • On future EFSF loans to Greece, the maturities of the loans will be extended from the current 7.5 years (to date Ireland and Portugal are the only countries using the facility w/ these terms) to a minimum of 15 years, and maximum of 30 years with a 10 year “grace” period. [IMF also said Portugal and Ireland will be extended these terms]
  • EFSF interest rate terms will be reduced to 3.5% from 5-6% level, extended to existing and future loans to Greece, Ireland, and Portugal
  • The EFSF can intervene in secondary markets to buy up sovereign bonds (officially), whenever deemed necessary 

Other Remarks:

  • Public deficits in all EU countries will be brought below 3% (of GDP) by 2013 at the latest
  • Extension of a “European Marshall Plan” in which countries can give money (no explicit terms provided) to Greece to drive economic growth
  • Reliance on credit rating agencies should be reduced
  • Q&A Call-Out: Trichet insisted that Greece is not in selective default. When again questioned that the PSI is tantamount to a default through restructuring, as technically defined by the credit agencies, Trichet replied that today’s package shouldn’t trigger a credit event (default) with credit agencies (Throat clear).

Got Risk Management?

Matthew Hedrick

Analyst