Investors relieved by Greece bailout deal but elephant in the room remains

Investors breathed another sigh of relief in early-hours trading on Friday morning as Greece’s creditors agreed the terms of another miniature bailout – but failed to address any possible debt relief.

The latest deal unlocks €8.5bn (£7.4bn) in cash that Greece will use to pay back investors for older debt that comes due in mid-July.

The yield on Greek government debt maturing in 2025 fell by 8.6 basis points since yesterday afternoon, according to Tradeweb, as investors bought more debt. Yields move inversely to prices, which rose this morning in response to higher demand.

The euro also strengthened in morning trading as another political risk event receded, reaching $1.116 against the US dollar.

However, the failure to address debt relief measures, widely agreed as necessary for the Greek economy to kick-start growth, has limited the scope for a bigger rebound.

Kit Juckes, global fixed income strategist at Societe Generale, said: “The politics of debt relief are too toxic to cope with so Jeroen Dijsselbloem called for the tee, put the debt can on top of it, lined it up and kicked it straight between the posts and down the road behind.”

While the International Monetary Fund (IMF), an increasingly unwilling participant in the bailout, has publicly said the Greek debt burden is unsustainable, the European Commission has held firm against debt relief.

Reducing the Greece’s debt would entail delivering losses to lenders in the Eurozone’s stronger economies, including Germany, or else extend the repayment schedules of debt significantly.

This is widely seen as politically infeasible at least until after the German Bundestag elections in September.

Greece and the IMF both agree the debt burden is unsustainable. If Greece were perceived as able to pay off its debts that could allow it to re-enter capital markets properly and also be part of the European Central Bank’s quantitative easing (QE) programme, which would raise demand for its debt.

Chris Scicluna, head of economic research at Daiwa Capital Markets, said: “Such measures now seem unlikely to be agreed until the middle of 2018, probably just as the ECB’s QE is being wound up, meaning that Greek bonds will likely have remained ineligible for purchase throughout the whole programme.”

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