MADRID | Analistas Financieros Internacionales or Afi in its investor note on Tuesday described the euro plan to deal with Greece’s tumbling economy as plausible, adding to the lighthearted welcome that the Spanish financial City has given the first details of the operation.
“The roadmap that is emerging from the news appears to be feasible, although the extent and depth of its concretion is what will eventually allow us to say that, this time, progress is actually being made towards a definitive solution.”
And these are the four points Afi can see as the basis for optimism:
“1. Strengthening of the ECB’s liquidity operations, through the restoration of long-term auctions (to six and 12 months) and/or re-activation of the covered bonds programme (stopped in June 2010). We assign it a high probability. An imminent cut in the repo rate would be more doubtful, even though we have contemplated it in our forecasts. Banking sector profits in the stock market are in line with this.
“2. Aggressive Greek debt restructuring: reduction of its nominal value by approximately 50% to 60% (compared to the suggested 21% in the current Greek exchange). Goal: to manage the situation in Greece with the country within the euro and minimise the risks of a disorderly restructuring. The reaction: severe punishment for the markets’ pricing of the Greek banking sector and a equally a strong hit against rescued economies. A note: again, the Troika has suspended its return to Greece that had been scheduled for today, waiting for the Parliament to vote the new austerity measures. The release of the next tranche of aid, thus, is delayed pending approval at next weekend’s Ecofin meeting.
“3. Re-capitalisation of the banking sector. The need to advance in this direction is now widely accepted, yet how this will be done still remains to be determined. In 21 July statement, the possibility that the EFSF granted loans to governments so that they could inject capital was already considered.
“4. The latest but still in-the-works idea: enhancing the European Financial Stability Facility effective capacity by allowing leverage. How? With the current €440bn fund, the EFSF would cover the first losses in case of default of the rescued/aided country; the remainder of its funding would have the European Central Bank’s endorsement. There’s another more ingenious option: that EFSF acquires the condition of a bank and could finance itself in the ECB auctions. Goal: to draw a firewall for Italy and Spain.”