Greece will stay but with new cap structure

“It’s very important that yesterday the leaders of the two largest economies of the euro zone reaffirmed their commitment to do whatever it takes in order to ensure financial stability in the euro zone. And they very clearly stated that the future of Greece is in the euro zone,” said Oli Rhen, the EU Economic Commissioner. I have no doubt that Greece stays in the Euro zone, it’s just the state of their balance sheet that needs to be fixed and that will ultimately be done thru a 50%+ cut to the value of their existing debt outstanding. It seems that this won’t be happening in the next two weeks as Greece will get their next tranche of money at month end but come October there will be calls to finally do this at the same time 17 Parliaments vote (Spain voted yes today) on an expansion of the EFSF. Of interest today and maybe in preparation for this inevitable event for Greece, Spain’s Finance Minister said “a new recapitalization of the financial sector is being discussed in Europe.” This comes after Germany said last week that they are preparing their banks for a Greek default. On the pat on the back comments for Greece from Germany and France, Greek bonds are rallying bringing the 1 yr yield down to just 138% and the 2 yr to only 69%. The euro basis swap and Euribor/OIS spread are narrower and the 5 yr ITraxx financial CDS index is as well. Spain sold longer dated paper at yields around 5% and an amount a touch below the maximum wanted.

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