It appears that a deal involving the EU and Greece is imminent. Greek bond yields hit their peak level in the current crisis, the ECB has altered its rules for collateral and the media are reporting that a deal is in place (here and here.)
The FT reports on the negotiations over the terms of the deal:
Officials added that Germany was sticking to its demand that the eurozone portion of the loans would have to be made at or near Greek market rates of 6 per cent or more, though this could lead to different rates being charged by other countries.
One said the agreement “reflects high rates … it is not a ‘subsidy’ and thus not a climbdown. Not even the Germans regard most recent rates as market rates”.
The FT also editorialises on this, blaming the Germans for failing to calm the bond markets sufficiently:
Berlin is also adamant liquidity support be given at market rates. This makes no sense: a rescue is needed precisely when debt markets cease to function and refuse to refinance Greece at sustainable rates. Insisting that a rescue takes place at “market rates” is to insist no rescue takes place at all. Market yields reflect this contradiction, and show that Europe has not yet put its money where its mouth is.
I have a tendency to question agreed wisdom so let me play the role of academic devil’s advocate here for a second. Ultimately, Greek fiscal stability will require a combination of lower spending and higher taxes. Yes, bond yields at current levels—if sustained—would be unlikely to be consistent with long-run fiscal stability.
However, a program that
(a) Made it clear that Greece would be able to roll over private sector debt because the EU will intervene to provide the funds
(b) Credibly lead to the adjustments in Greece’s structural deficit.
should stabilise the fiscal situation in Greece and lead to a return to lower borrowing rates for Greece. That the EU should charge a high interest rate for providing the funds for (a) and overseeing the program for (b) is, it could be argued, not unreasonable. Indeed, if the rates associated with (a) are not high enough to be painful then it may be difficult to get much traction going on (b).
Of course, the Greek government is going to look to get the interest rates on its assistant loans set as low as possible. But that doesn’t mean that a percent here or there on these loans is the key issue right now.
The other major unknown here is how any deal will affect the sovereign bond market’s attitude to Ireland.