AMERIPRISE FINANCIAL, INC.
Tension Mounting Over Greece amid Default Concerns
04/20/2015 | David Joy
When Greece was granted a four month extension to its bailout agreement on February 20, just days before it was set to expire, there was hope that the extra time would allow the new government to find a way to both satisfy its creditors and also to fulfill its election promise of pushing back on the austerity measures imposed by the bailout.
After falling sharply ahead of the national election in January, stocks rallied in anticipation of new, less onerous terms that might allow the Greek economy more breathing room.
Unfortunately, the good feelings were short lived. Stocks peaked the day after the agreement and have fallen ever since. From the close on February 24, through last Friday, the Athens Stock Exchange General Index is down 22 percent. Bank stocks are down even more. The yield on Greek ten-year government bonds has climbed to 12.79 percent from 8.37. Shorter-term note yields are now quoted in the high-20s. And according to Bloomberg, the credit default swap market, in essence a bond default insurance exchange, is currently pricing in an 82 percent chance of default.
Markets elsewhere in the Eurozone had largely exhibited less concern, but that appears to be changing. The Euro Stoxx 50 index is up 18 percent on the year, but just 3.6 percent since February 24. And last week it fell 4 percent. In just the past two weeks, ten-year bond yields in Spain have risen by 25 basis points, in Italy by 21, and in Portugal by 34.
Most believe the chances of a bond default are not as high as expressed by the credit default swap market, but they are high enough to cause concern. Despite the four month extension, negotiations over the details of a new agreement have yielded little progress. The ruling Syriza Party wants to stick to its campaign promise of throwing off the yoke of austerity, while the so-called Troika is sticking to its position of demanding structural reform.
And while the existing agreement extends through June, Greece does not have enough cash on hand to get it that far. It has pension and wage payments due at the end of April and a 747 million euro payment due to the International Monetary Fund on May 12. There is a total of 7.2 billion euros remaining to be disbursed from the existing bailout agreement, enough to cover Greece's needs until the existing agreement expires, but its creditors have not seen enough progress on a new agreement to release the funds. Eurozone finance ministers meet this week, but hardly anyone expects much progress to be made by then. They meet again on May 11.
It is impossible to say what might actually happen. The Greek government might soften its position enough to allow for compromise, but that will require political courage that it may not summon. An interim agreement could be reached that allows for some disbursement of funds and buys more time for further negotiation. Or, Greece could default. If it does, and the condition is not corrected, it could lead ultimately to Greece leaving the Eurozone. The likelihood of that happening still appears to be low, but not zero.
As the negotiations drag on, and the deadlines for payments due get closer, investor anxiety will continue to rise. If the negotiations end badly, a flight to safety would likely ensue, pressuring risk assets lower, at least temporarily. But the Eurozone as a whole is in a better position today to absorb a negative outcome than it was a few years ago. Bank capital has been rebuilt and the system's exposure to Greek liabilities has been reduced. In addition, the European Central Bank has expanded its mandate to truly act as a lender of last resort. And lastly, the Eurozone economy is expanding rather than contracting. Even still, the next few weeks are likely to be tense.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The Athens Stock Exchange General Index is a capitalization-weighted index of Greek stocks listed on the Athens Stock Exchange.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within Eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
04/20/2015 | David Joy
When Greece was granted a four month extension to its bailout agreement on February 20, just days before it was set to expire, there was hope that the extra time would allow the new government to find a way to both satisfy its creditors and also to fulfill its election promise of pushing back on the austerity measures imposed by the bailout.
After falling sharply ahead of the national election in January, stocks rallied in anticipation of new, less onerous terms that might allow the Greek economy more breathing room.
Unfortunately, the good feelings were short lived. Stocks peaked the day after the agreement and have fallen ever since. From the close on February 24, through last Friday, the Athens Stock Exchange General Index is down 22 percent. Bank stocks are down even more. The yield on Greek ten-year government bonds has climbed to 12.79 percent from 8.37. Shorter-term note yields are now quoted in the high-20s. And according to Bloomberg, the credit default swap market, in essence a bond default insurance exchange, is currently pricing in an 82 percent chance of default.
Markets elsewhere in the Eurozone had largely exhibited less concern, but that appears to be changing. The Euro Stoxx 50 index is up 18 percent on the year, but just 3.6 percent since February 24. And last week it fell 4 percent. In just the past two weeks, ten-year bond yields in Spain have risen by 25 basis points, in Italy by 21, and in Portugal by 34.
Most believe the chances of a bond default are not as high as expressed by the credit default swap market, but they are high enough to cause concern. Despite the four month extension, negotiations over the details of a new agreement have yielded little progress. The ruling Syriza Party wants to stick to its campaign promise of throwing off the yoke of austerity, while the so-called Troika is sticking to its position of demanding structural reform.
And while the existing agreement extends through June, Greece does not have enough cash on hand to get it that far. It has pension and wage payments due at the end of April and a 747 million euro payment due to the International Monetary Fund on May 12. There is a total of 7.2 billion euros remaining to be disbursed from the existing bailout agreement, enough to cover Greece's needs until the existing agreement expires, but its creditors have not seen enough progress on a new agreement to release the funds. Eurozone finance ministers meet this week, but hardly anyone expects much progress to be made by then. They meet again on May 11.
It is impossible to say what might actually happen. The Greek government might soften its position enough to allow for compromise, but that will require political courage that it may not summon. An interim agreement could be reached that allows for some disbursement of funds and buys more time for further negotiation. Or, Greece could default. If it does, and the condition is not corrected, it could lead ultimately to Greece leaving the Eurozone. The likelihood of that happening still appears to be low, but not zero.
As the negotiations drag on, and the deadlines for payments due get closer, investor anxiety will continue to rise. If the negotiations end badly, a flight to safety would likely ensue, pressuring risk assets lower, at least temporarily. But the Eurozone as a whole is in a better position today to absorb a negative outcome than it was a few years ago. Bank capital has been rebuilt and the system's exposure to Greek liabilities has been reduced. In addition, the European Central Bank has expanded its mandate to truly act as a lender of last resort. And lastly, the Eurozone economy is expanding rather than contracting. Even still, the next few weeks are likely to be tense.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The Athens Stock Exchange General Index is a capitalization-weighted index of Greek stocks listed on the Athens Stock Exchange.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within Eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
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