UPDATE: New Greek rescue plan - industry reaction

Managers have welcomed the €109bn bailout plan for Greece agreed by European leaders yesterday, saying although sovereign debt crisis is not over, the latest plans are a step towards a solution.

The draft rescue plan includes a partial default on Greece's debt, as €37bn of the bailout fund will come from private sector bondholders. The period of repayment has also doubled from seven and a half to fifteen years and the interest rate on rescue loans has been cut from 5% to 3.5%.

According to F&C, authorities expect 90% voluntary participation of the private sector, which would provide about €135bn between 2011 and 2020.

The second key element of the scheme is the extension of the powers and flexibility of the European Financial Stability Facility (EFSF), which will enable the fund to make precautionary loans and buy bonds in the secondary market.

It will also be given the ability to increase capital strength of struggling banks.

However, its lending capacity, currently at €440bn, has not been extended accordingly.

Here is how managers have reacted to the European leaders' bailout package:

Fidelity International - Ian Spreadbury, manager of the Strategic Bond fund

"The outcome of the EU summit has delivered some respite for investors. I was becoming increasingly concerned with the lack of leadership shown in Europe and had been trimming risk in my funds.

"The package for Greece was widely expected, but the extra flexibility given to the EFSF and private sector involvement developments are very positive. We can expect some relief for risk markets in the near term, but I doubt we have seen the end of the European sovereign debt crisis.

"The market will probably now refocus on fundamentals. This should be good for corporate bonds, because companies are in good shape and the weak economic outlook should restrain management from expanding balance sheets too much. Government bonds will also remain underpinned by the slow growth environment, especially with rate rises this year now looking less likely."

Rathbones Unit Trust Management - Julian Chillingworth, chief investment officer

"Angela Merkel can return to the German electorate with the message that private investors are taking some of the pain. Durations are extended to fifteen years. In tandem, the ECB has taken the first move to establishing a European Monetary Fund which will backstop EU states whose bond markets have come under pressure, hence offering relief for Italy and Spain. This will have to be approved by individual states' parliaments, with particular focus on Germany's.

"In short, it has been observed the ‘can' has been well and truly ‘hoofed' down the road. Growth remains essential in peripheral economies to make a dent in Greece's 150% debt/GDP ratio. The rally in debt and equity markets is likely to continue for a few days."

J.P.Morgan - David Tan, global head of rates for fixed income

"The extension of maturities of official loans made to Greece, Ireland and Portugal from 7.5 years to at least 15 years is another indirect step towards fiscal transfers and common bond issuance in all but name. Official loans extended by the EFSF to these debtor countries will now carry a reduced 3.5% rate of interest that is close to that of an AAA rated country.

"Overall we believe yesterday's package contain some very positive pre-emptive elements including bank recapitalisation and lines of credit that can be extended to non-programme countries before funding stresses become too acute. The relief rally will continue and some more time has been bought.

"Explicit fiscal transfers or bond haircuts are the only means to get debt/GDP down sufficiently to serviceable levels. What is critical here will be the actual extent of private sector involvement as this will not be known for sure until the actual exchanges occur. Assuming a participation rate of 90% (it is not known what the assumed 10% non-participants will get), estimates of the long run reduction in Greece's debt/gdp ratio are of the order of 15% to 30% points.

"In addition, once debt/GDP has been forced down, implementation risks of austerity measures previously announced remain high. That will still concern peripheral eurozone markets in the longer term.

"The use of EFSF to buy bonds in the secondary markets (presumably at close to market prices) is an essential element of this package but did not quite go far enough. We would have preferred to see a formal programme of buy-backs via reverse auctions (at close to market prices) to specifically retire debt and drive down debt/GDP ratios.

"Likewise the use of EFSF funds, via loans to governments, to recapitalise the banks is a strong positive. Importantly the EFSF will also be able to recapitalise banks in non-programme countries. This could include banks from non-programme countries that failed or marginally passed last week's stress test. Clearly this measure was aimed at trying to ring fence and protect Italy and Spain from being dragged further into the crisis.

"Credit enhancement through posting of collateral or guarantees will ensure continued access to Eurosystem liquidity for Greek banks. This gets round the ECB's refusal to accept defaulted securities as collateral and mean that Greek banks will not be deprived of their life blood of ECB funding. This was very important.

"In the markets yesterday, Bund yields were 12bp higher on the day and almost 25bp higher since the start of the week. Peripheral spreads were sharply tighter. 10-year Greece was 100bp tighter on the day, and Italy and Spain about 35bp tighter. Greece is a further 150bp tighter again this morning. This short covering rally is likely to continue in the near term as peripheral bond yields have widened to astronomical levels in terms of the negative carry cost of running short positions.

 

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