Greek deal gets approval in the markets

[April 20, 2010]  LONDON (AP) -- Greek shares led a stock market advance in Europe Monday as fears of a Greek default began to ease after its partners in the eurozone finally cobbled together a financial support package for the debt-laden country.

In Europe, stocks advanced further following Friday gains when talk of the agreement swept through the markets. The FTSE 100 index of leading British shares was up 3.96 points, or 0.1 percent, at 5,774.94 while Germany's DAX rose 9.62 points, or 0.2 percent, to 6,259.32. The CAC-40 in France was 5.4 points, or 0.1 percent, higher at 4,055.94.

Athens's main composite index was the biggest gainer, rising 4.8 percent to 2,087.43, with the banks heavily in demand.

Wall Street was also poised to open higher at the bell -- Dow futures were up 19 points, or 0.2 percent, at 10,972 while the broader Standard & Poor's 500 futures rose 2.2 points, or 0.2 percent, at 1,194.80.

The euro and Greek bond prices were the main beneficiaries of the weekend agreement by the eurozone to provide up to euro30 billion worth of loans to Greece at a beneficial interest rate -- the borrowing cost to Greece would be around 5 percent for a three-year loan, over 2 percentage points lower than its market rates on Friday.

By midmorning London time, the euro was trading at near a one-month high $1.3626, around 2 cents higher than where it was before rumors of the bailout package took root during Friday's session. Meanwhile, the difference between Greek and German interest rates narrowed across for both short-term and long-term debt -- the yield on Greek 5-year bonds fell around 0.35 percentage points to 6.5 percent while the rate on ten-year issues dropped to 6.65 percent from around 7 percent.

The narrower the difference, the more confidence in Greece.

"So far the market reaction has been positive because the 'deal' is seen as providing the Greek government a reprieve on its near-term funding and liquidity issues and has pushed forward the day of reckoning," said Neil Mackinnon, global macro strategist at VTB Capital.

However, Mackinnon doubts that it's anything other than a short-term reprieve especially as the backstop agreement does nothing to resolve Greece's long-term economic prospects -- it faces years of falling output -- or address the risks of a similar crisis exploding in other eurozone countries like Spain, Portugal and Italy.

"Though the pressure of a near-term default has diminished, it doesn't resolve the solvency issue facing Greece," he added.

Greece has promised its partners that it will get a handle on its debt by instigating deep budget cuts so it can reduce its budget deficit to 8.7 percent of national income this year from last year's 12.9 percent -- euro rules on paper require each member country to keep the deficit at 3 percent of gross domestic product but the financial crisis and the subsequent recession have meant those limits have been widely breached.

For now though, Greece has won some respite. Whether it has to draw on the eurozone facility, which could be supplemented by a further euro15 billion of funds from the International Monetary Fund, depends heavily on how the bond markets react -- crucially on whether the market rate falls toward the 5 percent being offered by the eurozone.

Greece needs to renew around euro12 billion of debt in May to refinance previous debt obligations -- a key test could be Monday's euro1.2 billion sale of 26- and 52-week treasury bills.

Whether Greece formally requests the promised the funds or not, the markets have been left with a sour taste in their mouths after months of wrangling with the EU have exposed sharp divisions between the countries and the lack of budgetary controls at the heart of the euro experiment.

"The Europeans have bought some time to let the Greeks get their fiscal house in order," said Kit Juckes, chief economist at ECU Group.

"The price, of course, is that fiscal policy will need to be tightened at a delicate point in the economic cycle and the upshot is that for all the enthusiasm with which markets may greet this latest deal, the European Central Bank is on hold for even longer and the euro will have to take some of the strain by weakening further," he added.

Earlier in Asia, Hong Kong's Hang Seng index fell 70.33 points, or 0.3 percent, at 22,138.17 while Japan's Nikkei 225 stock average rose 47.56 points, or 0.4 percent, at 11,251.90. China's main Shanghai index fell 16.08 points, or 0.5 percent, at 3,129.26.

In oil markets, benchmark crude for May delivery was up 51 cents to $85.43 a barrel.

[Associated Press; By PAN PYLAS]

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