13 April 2010

Economy: Cash Greets Greece

After months of speculations and rounds of discussions, all the European Stars reunite at last, as shown in EU flag. On 12th April 2010, the euro zone nations have agreed on a Euro30 billion rescue package for their heavily-indebted partner - Greece. The finance ministers of the 16 European Union nations, who have euro as their common currency, finalized the details of their bail out plan for Greece.

The annoucement comes amid mounting concern in the financial markets about the cash strapped Greek government's ability to service its staggering debts of more than Euro400 billion, thus, pulling down euro to very low level recently.

How was the package like?
Under the package, it will cover a 3-year fixed 5% interest loan and the amount of the loan could be increased over the next 12 months. The European loan is likely to be shared proportionally based on the breakdown of the ECB's capital. The IMF will complete the plan with a Euro15 billion loan at an adjustable rate based on the special drawing rights rate.

Yield falls...
The yield on the country's 12-month T-bill plummeted to 5.28%, suggesting the threat of a near-term default had been lifted. Today, Greece is going to auction Euro1.2 billion T-bills, which is now deemed as "Zero-Default Risk". Wow!!!

Uncertainties remain...
Although the emergency aid fund may reassure investors and make them more willing to continue buying Greek bonds, uncertainties remain over the long-term prospects for reducing Greece's debt mountain, which have dented confidence in the euro.

The Greek official said the government would decide within a few days whether to ask for the aid, depending on whether market interest rate would subside. Anyway, 5% interest bearing loan provided, is well below current market rates of about 7.3%. Assistance for subsequent years would be decided later.

What's next?
Over the next 2 years, Greek economic activity is likely to continue to decline. Euro is expected to appreciate with French and German bonds yield to increase slightly. I think that UK could be the next concern for the market.

Source: BNP paribas, Reuters, WorldNews, Bloomberg

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