Following an E.U. bailout offer slated to start in two years, Greece’s 10-year bond yields dropped below 8 percent, a decrease not seen in over 6 months.
The offer to Athens is dependent on the government following through with certain financial reforms connected to the agreement.
The small print of the deal, which was opposed by Germany which believes a bailout is a mistake, will be hammered out by euro zone economic authorities before the end of the month. In contrast to the German view, the IMF was convinced that a further loan agreement is the only option.
Debt relief will begin to flow once further deals are reached concerning the country’s fiscal reforms. The reform deal is expected to be confirmed in the next few days according to comments by the Eurogroup following its meeting last Monday.
“The International Monetary Fund has been fairly insistent on a course of action that sees further loans being made to prop up the Greek economy. It seems as if Germany are now coming around to the idea, if not wholeheartedly, and that is restoring some investor confidence” said Robert Barkley, - Executive Vice President of Portfolio Management at Orix Trading.
The financially beleaguered country saw its 10-year yields slump badly last week leading to a knock on effect dragging other European stocks down with them. Similarly the Greek 2-year yields declined 140 points to under 8 percent.
Germany’s fears may be well founded as a report by the European Stability Mechanism (ESM), as published by Reuters last week, outlined grave dangers regarding further Greek loans and the general sustainability of the planned deal.
In one of the possible scenarios outlined by the report, the E.U. would need to put a significant extension on the maturities of the loans and put an upper limit on interest payments. Deputy finance ministers are taking the ESM’s findings seriously and will prepare various bailout plans which will be discussed by the European finance chiefs in the last week of May.
Greece will have considerable loan repayments due in the next few months and some experts are pessimistic that an agreement between Athens and the euro zone financial ministers will be reached soon.
"There is a danger that talks could drag out well into the summer due to differing philosophies on the Greek issue," said DZ Bank investment officer Hendrik Lodde. "Most of the negativity seems to be coming from creditors concerned that the proposed plan may not be the best way to proceed."
