While Angela Merkel is off trying to sell the Greek aid package to German voters in the run-up to a crucial regional election in Germany, the markets have already voted on the 110 billion Euro EU/IMF deal: thumbs down.
Win Thin of Brown Brothers Harriman says:
Markets have given a clear “thumbs down’ to the Greek aid package. Greek 2-year yields have surged 379 bp today to over 14%, and is dragging the rest of the periphery along. Portugal 2-year yield is up 67 bp, Ireland up 25 bp, Italy up 15 bp, and Spain up 25 bp. Greek CDSs are trading near 730 bp, below the highs around 850 bp last week but clearly still elevated. In other words, the markets are telling us that the aid package has not lessened default risk by any significant amount. Remember, the entire Greek aid package is predicated on getting market borrowing rates back down so that Greece can issue new debt for the private sector and stay current on its current debt load. That’s not happening yet.
The euro is making new lows for the cycle against the dollar, and concerns about Greece are helping to soften up EM currencies today as well. Not surprisingly, EMEA currencies are getting hit the hardest, with worst performers vs. USD today HUF, PLN, ZAR, CZK, and RON. We remain most bearish on EMEA within the EM space, and most bullish on Asia. Eastern Europe is highly dependent on exports to Western Europe, and we see sub par euro zone growth continuing for several years. RON was probably not helped by a 25 bp cut today in the policy rate to 6.25%, a record low, while ZAR sentiment may have been hurt by report that unemployment rose to 25.2% in Q1 from 24.3% previously. We think a rate cut is very likely at the next SARB meeting May 13. Bottom line: EMEA is going to be saddled with a combination of slow growth and the need for stable to lower interest rates, while Asia is enjoying strong growth and a rising need for tighter monetary policy.
Meanwhile, in Spain, the Spanish media are wondering where the 10 million euros are going to come from that Spain is contributing to the aid package. In fact, Spain is contributing more per capita (586 Euros) to Greece’s aid package than Germany (563 Euros). The Portuguese are contributing 2 billion or 534 Euros per capita. Ireland comes in at 1.28 billion or a gargantuan 819 Euros per capita.
Given the fiscal burdens already on these countries, it isn’t credible that they would be able to loan Greece money. But that is what is expected now that the Euro crisis has spiralled out of control. The markets aren’t buying it.