Greece Update: More Efforts before Assistance

Currency in Crisis

Greek bonds are continuing to recover from the sell-off at the end of last week that took the 10-year yield to 6.65%. Now quoted near 6.12%, it is the lowest yield since Feb 11, down 14 bp today.

The key consideration is that Greece has 1) delayed the bond offering expected this week after being postponed last week and 2) indications that Greece will announce new savings measures. These new savings measures are thought to be part of the precondition for material assistance that some suspect will emerge from Papandreou's meeting with Merkel on March 5th.

Reports last week suggested the Greek government was working on a package of additional measures that would be worth around 3.5 bln euros.

However, the form, amount and conditions of the the assistance is far from clear. In fact, an EU spokesperson indicated that yesterday's EU-Greek talks did not include a potential bailout.

We had thought it reasonable that whatever mechanism that Europe agrees upon for Greece would provide not simply a precedent but a framework for other euro zone members. However, the ad-hoc approach floated of using German and French government investment arms, seems particularly difficult scale.

As daunting as the Greece situation may be, the scale of Spain's challenge is even more so. Today's news that Spain's unemployment, already the highest in the euro zone rose further in February underscores its dire straits.

The number of Spaniards registering for unemployment rose by a little more 82k or 2% to 4.1 mln. Jobless claims are up 19% year-over-year. Around half the jobs lost in the euro zone in the past two years took place in Spain.

Spain's working scheme creating an estimated 400k jobs expired at the end of last year. As Spain unwinds some of is fiscal support, ostensibly in order to avoid Greece's fate, a similar job creating scheme this year is half the size.

According to BIS data, as of the end of Q3 2009, German and French banks had a combined $111.6 bln exposure to Greece. Their exposure to Spain was estimated at $429.1 bln. Total Greek debt was estimated at $235.3 bln. Total Spanish debt is estimated at $857.5 bln.