Eurozone uncertainty, illustrated bond edition

Posted by Tracy Allowayon Jun 10 08:55.

Or, what happens when European ministers continuously and very publicly talk about Greece.

From Citigroup’s Mark Schofield:

A consensus on the shape of any possible package still seems elusive, however. German Finance Minister Wolfgang Schauble was quoted this week as asking for a seven-year maturity extension on Greek debt, insisting that German support for a package would be conditional on a “quantified and substantial contribution” by bondholders. This stance, however, is opposed by both France and the ECB. The ECB along with German and French banks make up approximately two thirds of the positions in Greek government bonds held outside Greece, in our estimation. The ECB represents about half of that amount with Germany and France accounting for about 30% and 20% respectively. This means that even if the tide is shifting towards the German position, as seems to be the case, the process of hammering out the exact terms of any proposal could still prove to be very long and drawn-out.

Unfortunately, this makes it virtually impossible to value tier 3 EMU bonds. The table below shows various implicit rates of return for current 5yr bonds under a number of different scenarios, it can be seen that there is a huge spread of possible return outcomes that appear to depend largely on the outcome of a series of highly political negotiations. This is not a good basis on which to make fair-value judgments in our view.

No kidding, and it’s no wonder that some banks continue to offload the debt amidst the uncertainty.

Speaking of which — Schäuble’s at it again this Friday morning:

  • RTRS-GERMAN FINMIN SCHAEUBLE SAYS DISORDERLY DEFAULT OF GREECE WOULD HAVE DISASTROUS IMPACT ON MARKETS
  • RTRS-GERMAN FINMIN SCHAEUBLE SAYS GREECE MUST MAKE FAR-REACHING REFORMS IN EXCHANGE FOR MORE AID
  • RTRS-GERMAN FINMIN SCHAEUBLE SAYS MANY PEOPLE DOUBT THAT GREECE WILL BE ABLE TO PAY BACK DEBT
  • RTRS-GERMAN FINMIN SCHAEUBLE SAYS SEES FIRST SIGNS OF ECONOMIC RECOVERY IN GREECE
  • RTRS-GERMAN FINMIN SCHAEUBLE SAYS PARTICIPATION OF PRIVATE SECTOR IN ADDITIONAL GREEK DEBT RELIEF “UNAVOIDABLE”
  • RTRS-GERMAN FINMIN SCHAEUBLE SAYS BOND SWAP THAT EXTENDS MATURITIES BY 7 YEARS WOULD GIVE GREECE TIME, FAIR SOLUTION
  • RTRS-GERMAN FINMIN SCHAEUBLE SAYS WORKING GROUP HAS BEEN SET UP TO STUDY PRIVATE SECTOR ROLE IN GREEK RELIEF THAT WON’T HURT MARKETS
  • RTRS-GERMAN FINMIN SCHAEUBLE SAYS GERMANY WILL NOT ACCEPT DILUTION OF PRIVATE SECTOR LANGUAGE IN ESM
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  • Mr WordPress  On June 10, 2011 at 8:09 am

    Hi, this is a comment.
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