- EU and the IMF reach deal on Greece.
- The deal has lifted market sentiment, following a weak US session yesterday.
- Bank of Canada Governor Carney to head Bank of England.
EU and the IMF reach deal on Greece
. Last night, EU finance ministers agreed on a deal to reduce Greek debt by EUR40bn by 2020, equivalent to 124% of GDP, declining to "substantially lower" than 110% by 2022 (Eurogroup statement). The centrepiece of the agreement is a reduction in interest rates that Greece is charged under the first bail-out agreement by 100bp from the current spread of 150bp above Euribor.
This seems to be a compromise between French and Italian calls for a 30bp margin, while Germany insisted on a 90bp spread. The guarantee costs paid by Greece on EFSF loans granted under the second bailout were also reduced by 10bp. In addition, maturities of the bilateral loans and the EFSF loans were extended by 15 years, while interest rate payments on EFSF loans were postponed by 10 years.
The second key element of the agreement is for the ECB to forego profits on its Greek bond portfolio, acquired at a deep discount under the SMP programme. There were little details on the Greek debt buy-back programme, although the purchase price will not exceed Friday’s close, according to the statement. With these initiatives in place, EU officials backed the release of further funding.
The initiatives were also welcomed by IMF chief Lagarde; Greece’s debt load is now seen returning to a sustainable path, although progress on the debt buy-backs needs to be made before further funding is approved (see press release). However, Lagarde said that the IMF has no intentions of pulling out of the programme.
Bank of Canada Governor Carney to head Bank of England. Yesterday Chancellor of the Exchequer, Osborne, announced to the UK parliament that Mark Carney will become the 120th Governor of the Bank of England (BoE), succeeding Sir Mervyn King when his term ends in July. The appointment comes as a major surprise, as the native Canadian will become the first foreigner to head the BoE. However, it was welcomed by market participants, who see Carney as a breath of fresh air and point to his strong reputation, steering the Canadian banking sector unscathed through the financial crisis.
Sentiment lifted by EU/IMF deal to reduce Greek debt. Although the agreement was to some extent in line with what has been indicated in media reports recently, the sheer confirmation of a deal has nonetheless lifted sentiment on financial markets. Asian stocks are trading in green, while EUR/USD is trading close to 1.30 this morning. US equity index futures are also trading higher. Thus, sentiment seems to have improved over yesterday, when US equities traded lower on disappointing Thanksgiving-weekend sales growth, as well as a mix of concerns over the looming fiscal cliff and Greek debt woes.
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