After an extraordinary teleconference on Sunday, Eurozone members offered Greece a rescue package worth as much as $61 billion (45 billion euros) at below-market interest rates. But even though the aid package sparked a rally in Greek stocks and bonds, it probably won't be enough to cure the debt-plagued nation's long-term ills.
A surge in Greek borrowing costs last week sent yields to an 11-year high, forcing European finance ministers to take action. The result was an offer of as much as $40.7 billion (30 billion euros) in three-year loans over the next year. Another $20 billion (15 billion euros) in aid could come from the International Monetary Fund (IMF).
The interest rates charged to Athens would be around 5% for a three-year fixed loan – above the IMF's standard lending rate but below the 7.45% jittery investors were getting for purchasing Greek bonds last week.
"This is a huge amount," Stephen Jen, managing director at BlueGold Capital Management LLP in London and a former IMF economist, told Bloomberg News. "This is more than a bazooka. They have gone nuclear on the issue of Greece. In the short run, the market is short Greek assets so we'll get a rally in those."
News of the rescue package sent prices higher for short-term Greek debt vehicles, reflecting a lighter mood among investors who sensed a much lower risk of a debt default.
The yield on Greece's two-year note fell 149 basis points to 5.67%, the biggest one-day decline since at least 1998, when Bloomberg began collecting the data. Credit-default swaps on Greek sovereign debt tumbled 69 basis points to 357, the largest single-day drop ever, according to CMA DataVision prices.
Still, doubts persist over Greece's longer-term prospects. While the $61 billion appears adequate to support Greece's needs for the rest of this year, an analyst at HSBC Holdings PLC (NYSE ADR: HBC) told The Wall Street Journal there is still plenty of uncertainty about the country's ability to meet its obligations in the future.
"As we have consistently stated, 2010 is not the biggest challenge," the broker said. "Lowering the deficit towards 3% of GDP in the subsequent three years will be much tougher and the markets will require much more convincing along the way."
The highly unusual teleconference of euro-region officials, which included European Central Bank President Jean-Claude Trichet, did not specify just how much Greece might need in 2011 and 2012, the final years covered by the package, Bloomberg reported.
"The aid package has gained time," said currencies analysts at French bank BNP Paribas (OTC: BNPQY) in London. "But with financial aid coming at relatively expensive terms, we fear the problem is just delayed and not solved," the bank told clients in a note obtained by The Journal.
The rescue package came after months of sparring among members of the 16-nation bloc over how to prevent Greece's financial plight from spreading and to thwart concerns about the euro's viability.
One of the most contentious issues was interest rates. Germany abandoned an earlier demand that Greece pay market rates after France and other finance ministers pushed for easier terms.
Greek finance minister George Papaconstantinou made it clear that the government had not yet asked for the money, and expressed confidence that the very existence of the package would allow his country to access debt markets at sustainable rates.
He told the Financial Times that bond investors will determine whether or not Greece needs to tap the aid.
"We believe we can continue to borrow on the [international capital markets] without obstacles," Papaconstantinou told the FT.
The market will first have its say Tuesday, when the Greek Public Debt Management Agency will offer a total of $1.63 billion in six- and 12-month Treasury bills. The results of that auction will be crucial to setting the market tone for the coming days, The Journal said, citing anonymous participants.
An even bigger challenge will come April 20, when government officials test investor interest in a dollar-denominated bond valued at up to $10 billion. That auction is planned to relieve Greek funding gaps through the end of May.
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