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Greece defaults but markets rejoice - Latest Market Analysis

Eurozone developments were once again the driver of financial markets, as investors breathed a sigh of relief over the apparent progress made in yesterday’s meeting in Brussels. Whilst markets rallied yesterday, it was not until this morning that full details of the package were released and digested. Key points included the agreement of a second €109bn bailout package for Greece which finally accepted private sector involvement. Along with less onerous credit terms in current bailout packages and increased powers to the EFSF, Greek bond holders would be given four options: three forms of debt exchange and one roll-over plan. It was estimated that the deal would cut Greece’s debt to GDP ratio by approximately 25%, although the ratings agency Fitch confirmed what the Eurozeone leaders could not bring themselves to say, that Greece would default.

Effectively, existing Greek bondholders will not be paid back when the terms of their bonds should have dictated, plus they will receive less back than they lent to Greece in the first place. As either event would technically be classified as a default, it seems a farce that anyone could consider it as anything else.

The positive reception evident on Thursday continued into the market open, with peripheral bond yields decreasing and the FTSE opening higher. The optimism gradually faded throughout the day however, largely as the knee jerk reaction to much needed political collaboration gave way to concerns over the details of the package. It is also likely that with the key Brussels meeting out of the way, markets turned their focus to weak economic data from the European core that had previously been overshadowed.

Banks gave up some of their early gains and the euro lost 0.4% against the Swiss franc in a safe haven flow that implies that the Eurozone’s troubles are far from over. The FTSE finished the day 0.6% better off at 5935, but with increasing concern over the longevity of the measures and their ability to prevent contagion.

This was posted in Bdaily's Members' News section by John Dance .