Raymond James Bond Commentary (Week of Feb 21st)


Raymond James Bond Market CommentaryGreece’s Moment of Truth

By Benjamin Streed


U.S. markets were closed Monday in celebration of Presidents Day, but the European continent continued to struggle with the Greek debt overhang over the weekend. After nearly 14 hours of strenuous meeting in Brussels, European finance ministers agreed to a second bailout for Greece that totals €130 billion ($173 billion). Many European officials provided optimistic commentary last week before the summit began and many quoted the decline in yields for Spain and Italy as proof that the markets believed they could reach a reasonable and sustainable agreement. Details of the bailout are still emerging but it appears that European officials plan to commit at least €386 billion into an additional “backstop fund” to help save Greece, Ireland and Portugal from bankruptcy and is intended to help Europe protect itself from a potential debt-cascade that could endanger the entire European monetary union. Interestingly, private investors may face the toughest decision of all involved parties as the bailout comes with the requirement that 90% of debt holders agree to take part in a debt-exchange program that could see their investments written down by as much as 53.5%. The debt exchange is intended to help Greece stay solvent through the month of March in which nearly €18 billion in debt is scheduled to mature.

A recent analysis conducted by the IMF illustrated the difficulties that a country like Greece may face moving forward; it could be unable to grow its way out of its fiscal troubles given that it cannot devalue its own currency. The analysis concludes that, “Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it”. The IMF is worried that the Greek debt-to-GDP ratio could spike back up towards 160% in the future which is much higher than the estimated “sustainable” level of 120.5% for the longer-term. In hopes of keeping this ratio down the Greek Parliament has already listed out nearly €325 billion in spending cuts, despite ongoing civil unrest and an unemployment rate that tops 20%. Olli Rehn, the European Union’s Economic and Monetary Commissioner summed up the difficulties surrounding the Greek debt talks when he said, “We underestimated the challenge stemming from weak administrative capacity and also weak political unity”.

The battle to arrange financing for Greece has been a seemingly unending process and it appears that some of the mistrust that has plagued the negotiations has found its way into the second bailout; the package will utilize specialized funding accounts that will strictly aim to keep Greece solvent, regardless of whether or not the country can meet its stated government budget. Despite everything that was accomplished in Europe over the weekend, it remains to be seen whether the markets believe that Greece will be able to implement its new austerity measures and, more importantly, whether or not the required percentage of private investors will agree to the bond swap deal. Emerging from the weekend, Treasury yields advanced showing some potential optimism for the deal. Two-year Treasury yields were up early on Tuesday to 0.29% and now sit near their highest levels since last October.


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The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
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