What Does Greece Want and What's It Going to Get

Currency in Crisis

Greek Prime Minister Papandreou has been arguing that Greece is not asking for material aid, but rather some kind of convincing support that would lower the yield that it must pay. He has supported the European Socialist call for an EMU fund that lends to Greece (and ostensibly others if/when needed as well).

Papandreou may not get exactly what he wants, but he appears to be playing well with a weak hand. Greek 10-year yields have fallen 32 bp this month (bunds are unchanged) retracing about 1/3 of the increase in Jan and most of Feb.

More impressive and more important, given the likely tenor of new Greek issuance, the 2-year yield has fallen 165 bp over the past month, retracing more than half of the increase seen in Jan and most of Feb.

European officials still seem to be pretending that it is their decision whether the IMF resources are utilized. It is not clear that their permission is really required. In fact, Papandreou had threatened to go to the IMF if Europe failed to come up with some mechanism of support.

It is clearer now though that critical mass of euro zone members are inclined to defer to the IMF. There is some speculation that some sort of deal could be announced as early as tonight, encourage by comments from Junker. The talk is a 10-20 bln euro package, but Papandreou is still insisting Greece is not asking more money. A large European contingent continues to argue that any funds need to only a last resort.

Greece needs about 10-15 bln euros over the next several weeks. It faces an 8.2 bln euro bond maturity on April 20 and another one roughly the same size on May 19th. In addition, there are about 3.9 bln euros of bills maturing. Assuming the summit comes up with some supportive words and a mechanism, Greece could come to the market in the next week or so with a new bond issue.

One of the most important developments today is the confirmation by ECB President Trichet that the ECB's collateral rules will not be tightened next year as initially envisaged. The concern that if Moody's were to cut Greek's credit rating that Greek bonds would no longer be used as collateral to borrow from the ECB. Trichet had hinted that it would consider still accepting Greek bonds next year a couple of weeks ago, strengthened the message. Trichet indicated that he did not expect Greek credit ratings will be cut again.

The euro seemed to trade about a third of a cent higher in response to the speculation that some formal announcement is likely as early as late today. Additional gains now appear likely as some of the late shorts move to the sidelines. The next target is near $1.3400.