A major breakthrough in Greek debt talks was reached today as investors representing 95.7% of Greece`s privately held bonds agreed to restructure their bond holdings without being classified as a credit event and thereby not triggering the underlying credit default swaps. Out of these 95.7% of bond, investors holding 85.8% of bonds have voluntarily agreed to swap their current depressed bonds with new, lower yielding, higher maturity bonds, and the rest will be forced to accept the restructuring under invoking collective action. Where to now ?
This means for the Greek treasury a small to medium debt relief, lowering its debt to GDP ratio to the 120% level. Even though 120% still is a high level, close to the Italy`s debt level and to the US ratio of close to 110%, it is a more manageable figure. It also means that the second bailout plan will come into action and funds from the ECB, the IMF and the European Commission will soon be used for interest and principal payments.Even though the financial picture has been cleared for now, the underlying economic problems that pushed Greece into its biggest economic crisis have not been addressed: the country needs to restore its competitivity through either decreasing labor costs, increasing the overall productivity, or devaluation of its currency (which is currently not possible as it is in the European monetary union). The first two options are the most likely to be chosen, and it will take a few years until the Greek economy realigns to the more competitive nations.
Stock market reaction
The banking sectors has had a cold response in Europe as investors are discounting the haircuts on banking debt and adjusting their valuations. The German index bounced from the 6715 level to what is now 6851, showing a degree of relief on behalf of the German sector.
The S&P had a similar bounceback as the result of the Greek debt deal and is now looking to continue its upward move. Caution is very advised here as there are two possibilities: it will go on and start a steeper parabolic move, which will end in a sell-off (which would probably prompt chairman Bernanke to start some more quantitative easing) or it will go through a consolidation phase which will be interrupted by some major disappointing news coming from the US economy. I am counting on the second scenario for my short position.