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  1. Wealth
July 22, 2011

Lombard Odier on Greek rescue package

By Spear's

The package contains many positive elements that will help ease the debt burden of the countries that currently have a program (Greece, Portugal, Ireland). In particular the lower interest rate and lengthened maturities for the assistance loans will considerably reduce their debt servicing obligations

Stéphane Monier, Global Head of Fixed Income and Currencies, Lombard Odier Investment Managers:

Positives:
– The package contains many positive elements that will help ease the debt burden of the countries that currently have a program (Greece, Portugal, Ireland). In particular the lower interest rate and lengthened maturities for the assistance loans will considerably reduce their debt servicing obligations. Additionally, Greece will benefit from the rollover of maturing debt by banks and insurance companies.

– The introduction of the EFSF capability to purchase bonds on the secondary market should have a positive impact for spreads in Spain and Italy and limit contagion.

– The above factors have been well received by the market. Politicians delivered everything that was conceivable, just short of agreeing to issue Eurobonds that would have been equivalent to a shift to fiscal union.

Negatives:
However, some doubts remain:

– Rating agencies will most likely place Greece in selective default rating: How much of it is already priced into the market?

– No Increase in the lending capacity of the EFSF: What happens if Spain or Italy need assistance (the current lending capacity is insufficient to cover these countries)?

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– Will Greece have the determination and ability to deliver on its adjustment and privatisation program?

– Will the global growth environment be supportive enough to allow the periphery to adjust?
 
“Despite politicians expressing their strong commitment to keep the Euro together through this new package, we continue to worry about the peripheral countries capacity to deliver on their adjustment program,” says Stéphane Monier, Chief Investment Officer of Fixed Income and Currencies at Lombard Odier Investment Managers.

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