Stefano Fugazzi (ABC Economics) – Greece’s newly elected left-wing government requested on 18 February an extension of the Master Financial Assistance Facility Agreement for Greece. Following the agreement of the Eurogroup to extend the programme by four months, underpinned by the commitment of the Greek government to a comprehensive list of reforms and the completion of the national parliamentary procedures, the extension was finalised by a decision of the EFSF Board of Directors on 27 February. The extension allows the Greek authorities to design and implement, in close coordination with the EC/ECB/IMF, reforms that should lead to a successful conclusion of the review and the design of the follow-up arrangements.
Research objectives and sampling
With the likelihood of a new programme to be negotiated in the near term, the research unit of ABC Economics investigated how the sovereign debt markets reacted to the announcement of the first two Greek bailout programmes on 2 May 2010 and 14 March 2014.
Our sample includes the 10-year yields of the so-called GIIPS countries (Greece, Ireland, Italy, Portugal and Spain) in addition to the French and German sovereign papers.
2010 and 2012 Greek bailout programmes
First Economic Adjustment Programme for Greece
On 2 May 2010, the Eurogroup agreed to provide bilateral loans pooled by the European Commission (so-called “Greek Loan Facility” – GLF) for a total amount of €80 billion to be disbursed over the period May 2010 through June 2013. (This amount was eventually reduced by €2.7 billion, because Slovakia decided not to participate in the Greek Loan Facility Agreement while Ireland and Portugal stepped down from the facility as they requested financial assistance themselves).
The financial assistance agreed by euro-area Member States was part of a joint package, with the IMF committing additional €30 billion under a stand-by arrangement (SBA).
Second Economic Adjustment Programme for Greece
On 14 March 2012, euro area finance ministers approved financing of the Second Economic Adjustment Programme for Greece. The euro area Member States and the IMF committed the undisbursed amounts of the first programme (Greek Loan Facility) plus an additional €130 billion for the years 2012-14. Whereas the financing of the first programme was based on bilateral loans, it was agreed that – on the side of euro area Member States – the second programme would be financed by the European Financial Stability Facility (EFSF), which had been fully operational since August 2010.
In total, the second programme foresees financial assistance of €164.5 billion until the end of 2014. Of this amount, the euro area commitment amounts to €144.7 billion to be provided via the EFSF, while the IMF contributes €19.8 billion.
GIIPS and French spreads over 10-year German Bunds
In the case of the announcement of the first Greek bailout programme, over a 7-day horizon spreads over the 10-year German sovereign paper increased across the entire sample, ranging from a low of +5 points for France to a high of +102 points for Greece.
With regard to the second bailout package, spreads over the German bund decreased, ranging from -8 points for Spain to -43 points for the Portuguese sovereign paper. This was largely attributable to German yields increasing over the seven-day observation window (from 180 to 206 points).
Note that in 2012 Greek yields were not available as Greece was temporarily forced to withdraw from the international bond markets.
Review of the 10-year yield performance for GIIPS, France and Germany
When the first bailout programme was announced, we observed that 10-year yields increased in Greece, Ireland, Portugal and Spain – countries which at the time were already feeling (or beginning to feel) the heat of the so-called sovereign debt crisis. By contrast, French and German yields decreased over the 7-day horizon.
The picture is less clear when we assess the sovereign debt market reaction to the announcement of the second bailout programme as German bunds rose sharply whilst – with the exception of Spanish sovereign papers – all other yields remained broadly unchanged.
Stefano Fugazzi, London, 11 March 2015