Why EU/IMF aid won’t satisfy markets

By Emelia Sithole-Matarise

LONDON (BestGrowthStock) – Greece’s request on Friday to activate European Union and International Monetary Fund aid is no more than a short-term salve for problems that have prompted financial markets to start contemplating the risks of a debt restructuring.

The following are the key reasons why financial market moves on Friday were muted when compared with the scale of moves in recent weeks and month which saw the euro fall to a one-year low against the dollar and Greek bond yields soar to 12-year highs.

* Financial markets do not view the 45 billion euro IMF/EU aid package on the table as enough to solve Greece’s financing problems because it only covers its 2010 fiscal needs, not those due in the next two to three years.

* Concern that Greece might not be able to deliver on any additional IMF conditions given it is already scheduled to cut its deficit by 4 percentage points this year and is facing social unrest. Revisions to 2009 deficit data on Thursday compounded concerns.

* The IMF has already said deflation may be the only way out of the crisis. Such comments have highlighted to financial markets the competitiveness problems some smaller euro zone countries with higher-than-average consumer and wage inflation face when they are locked into a single currency.

* The Greek budget deficit cutting plans are perceived to rely more heavily than desired on tax receipts. Reaching budget deficit goals might therefore prove difficult if austerity measures trigger a deep recession and sharply erode tax revenues.

* Greek’s debt profile, which is heavily weighted to shorter-dated maturities, means it will be facing tougher funding pressures in the next two to three years.

* Debt redemptions make it imperative that Greece gets the money quickly enough and so far the timeline for handing over aid is unclear. Greece needs to raise 10 billion euros in May, with an 8.5 billion euro bond falling due on May 19 and coupon payments due on top of that.

* Indecision displayed by euro zone policymakers during their efforts to pull together the package for Greece has made financial market players skeptical about whether politicians can — and want to — move quickly enough to stem Greece’s rising debt costs, which are compounding its fiscal problems.

* The decision to call in the International Monetary Fund has raised questions among investors about the euro zone’s ability to sort out its own problems. Constraints on adjustment mechanisms, such as the exchange rate and monetary policy, which are out of Greece’s control are seen making it harder for the IMF to advise Greece on an adjustment path.

* It is unclear whether any aid package for Greece would act as a template for any other euro zone country which comes under similar pressure. Analysts say the financial markets could just end up pushing yields up on other peripheral euro zone countries, such as Portugal, to test the euro zone’s preparedness to bail out other fiscally weak countries.

* The May 9 election in the state of North Rhine-Westphalia in Germany, where public opinion is strongly against helping Greece, could make it harder for Berlin to move quickly on agreeing to aid.

* Any overhaul of fundamental rules and regulations to prevent future Greece-style crises in the euro zone and improve the disciplinary process would require EU Treaty changes that would take too long, leaving financial markets with no clear idea of how budget policy rules are going to be enforced in the near future.

* The Greek credit default swap curve inverted earlier this year and has steepened further as investors have stepped up hedging against default risk. There is no sign of the CDS curve disinverting, a key sign that the market pressure is not about to let up anytime soon.

Investment Analysis

(Additional reporting by London markets team; Editing by Toby Chopra)

Why EU/IMF aid won’t satisfy markets