Intraday Market Thoughts

EFSF Risks Downgrade, Troika Turns to Greece

by Kyle Morrison
Jan 16, 2012 8:40

EFSF risks downgrade, Troika returns to Greece after PSI talks stall, US markets closed for Martin Luther King Day

Standard and Poors finally delivered on their December threat to downgrade France to AA+, however the added kicker was a negative outlook which puts Europes second biggest economy at a one in three risk of a further downgrade in the next 18 months. Further to that S&P also downgraded Italy two notches to BBB+, which given that the country still needs to raise over 40bn in the next six weeks presents further problems for European leaders.

Attention now turns to the EFSF and a bond auction tomorrow, as markets await a downgrade, given that S&P hinted that the downgrading of any of the triple A contributors would trigger a similar downgrade of the bailout fund. Given that France is the funds second biggest contributor at 20% it would seem only a matter of time before the fund follows suit.

The troika of lenders returns to Athens today in the wake of Fridays collapse of the private sector involvement (PSI) talks aimed at convincing the creditors to take haircuts of 50% of their holdings, in an attempt to get Greeces debt to GDP ration down to 120% of GDP by 2020.

The failure of these talks is a much bigger problem given that Greece has a bond maturity of 14bn due in March, and any changes that need to be agreed would need to be concluded soon given that the paperwork would need a significant lead time to be completed.

A failure to come to an agreement brings the likelihood that Greece will default on its debts that much closer, and the likelihood that the country would also have to leave the euro.

US markets will be closed due to Martin Luther King Day, which suggests that markets will be very thin in the afternoon session.


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