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Greece in limbo will keep markets volatile

Source: Reuters - Tue 27th Apr 2010

Until investors have a clear idea of exactly how much money Greece will receive from the European Union and the IMF - and when - uncertainty stemming from the Hellenic Republic's growing fiscal despair will weigh on global markets.

For Greece, the situation is critical as the cost of insuring its debt against default jumps from record to record, and the cost of raising capital to pay off old debts and run the country has spiraled out of control.

For the euro, the situation is in desperate need of repair. Each headline that sews even the slightest doubt in the mind's of investors that any plan to help Greece is delayed or insufficiently sized pushes the currency ever lower.

"I think a large, comprehensive and most importantly, expeditious package will help steady market expectations as far as Greece is concerned" said George Hoguet, global investment strategist and emerging market portfolio manager at State Street Global Advisors. He spoke on the sidelines of the IMF/World Bank spring meetings this weekend, where finance ministers and central bankers were preoccupied with Greece's debt problems and global financial imbalances.

Greek Finance Minister George Papaconstantinou, speaking after talks with the IMF and European Union in Washington, expressed confidence help would arrive in May.

But now that Greece has laid bare its debt problems and sought formal help, the onus is on the EU, the IMF and Athens to counter rising talk in the markets that the proposed 45- billion-euro rescue package is not enough.


Resolution is essential to build confidence over the long term.

"The bailout for Greece is not triggering the reaction among investors that European leaders had hoped for" said David Spegel, global head of emerging markets strategy at ING in New York.

"Monday will probably bring further pressure on the euro. U.S. markets will resist the contagion pressure as they remain, as they did last week, focused on earnings and in anticipation of the Fed statement" Spegel said.

Hans Humes, president of Greylock Capital Management, and another attendee at the spring meetings, raised the fear of a knock-on effect without a serious resolution soon.

Bets are building against other European nations such as Spain and Portugal, particularly in the credit default swaps market, which offers protection against defaults or restructurings.

Portuguese yield spreads over super-safe German Bunds have doubled during April to hit 200 basis points, while Italian and Spanish spreads were at their highest since February.

Rising debt costs for the other weak links in the euro zone have raised the specter of even more bailouts down the road, making the need for a Greek fix even more important.


Humes suggests a restructuring of Greece's debt where investors take a loss and Greece's debt load falls, could calm the markets.

"If you can organize a restructuring for Greece, get some sort of haircut, even if it is psychological" to alleviate concerns, Humes said.

Greece said at a briefing on Sunday that it has no plans to default on its debt or restructure it. However, countries such as Argentina rebuffed suggestions that it was going to default. But in 2001-2002 it rocked global markets with a massive $100 billion debt default that still haunts the country.

That said, "this has been a well publicized and very slow decline. Most traders are well prepared by now for the possibility of a default by Greece" said Greg Salvaggio, vice president for trading at Tempus Consulting in Washington.

On Friday, the single European currency recovered from near one-year lows against the U.S. dollar, rising 0.68 percent to $1.3383, after Greece said it would need help.

The euro is down more than 6 percent against the greenback this year and analysts expect more losses by year end.

"This is like watching the Titanic go down" said TJ Marta, chief market strategist at Marta on the Markets.

Still, for some investors, such as Alberto Bernal at BullTick Capital Markets, fears of financial havoc stemming from delays in the Greek package are excessive.

"It is going to be volatile until the agreement comes, but I don't think it will be terribly volatile in the U.S. or Latin American markets. Europe is going to be closer to the way the U.S. trades, but Greek bonds will probably continue to sell off" said Bernal, who is Bulltick Capital's head of macroeconomic strategy.

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