It was a party in stock markets here and in Europe today in response first to the news that an agreement was reached whereby banks and other investors will take a 50% reduction in the value of their Greek bonds and that the EFSF will be leveraged up to buy Italian and Spanish bonds. Banks will also raise their capital ratios to 9% over some period of time.
We also had an initial estimate of 3Q GDP of 2.5%, far better than economists had been fearing even a few weeks ago. Stocks here were up 3.5% – 6%. Markets in Germany and France were up 5% and 6% respectively, with some European bank stocks up as much as 20% on the day!
There are still a lot questions and the only real number so far is the so-called 50% haircut on Greek bonds. However, public investors like the IMF take no haircut at all. As a group they own just over half of Greek bonds so the write-down of Greek debt really works out to 25% on the whole – 50% on 50% = 25%.
While stock markets cheered loudly, bond markets were not as excited. The yield on Italian bonds, now back up to a 6% yield was little changed today. People also want to know if leveraging the EFSF up to 1.0 – 1.4 trillion is enough to keep rates on Italian bonds from getting out of hand. And, where is that money for that coming from? Further, will Italy which has been so resistant to austerity programs really get with the program?
Note too that because of the 25% voluntary haircut, this does not reduce Greek by as much as they need. The target, if the Grecian economy and leadership cooperate is to Greek as a percentage of GDP down to 120% by 2026. That is still a monstrous debt load and the Greek economy is getting worse, not better.
Still, the one thing that was communicated loud and clear is that Germany means it when they say they will not let the Euro fail.