On July 21, EU leaders agreed to a second bailout for Greece, one that was supposed to draw a line under the euro zone debt crisis and give the new government in Athens a chance come to grips with the huge debts it inherited when it was elected.
One month later, and the situation appears to be getting worse rather than better, according to Simon Derrick, the head of currency research at Bank of New York Mellon.
“The first of these factors was the Finnish government’s insistence during the negotiations in July on securing collateral against its contribution to the package,” Derrick said in a research note.
Given the nature of the deal between Greece and Finland, others like Austria, the Netherlands and Slovenia demanded the same deal. The Dutch finance minister is now threatening to veto the entire Greek agreement, saying the deal is “not compatible with the principle of equal treatment of all euro countries”.
The Greek banking industry also remains a major concern, according to Derrick. Not only are private creditors reluctant to sign up debt swaps for longer-dated bonds, but people are now beginning to question whether an effective haircut of 21 percent is too small given the pressures facing Greece.
With the Greek finance minister predicting the economy could now contract by more than 5 percent in 2011 rather than the 3.9 percent previously predicted, Greek bond yields are fast approaching the levels seen just days before the last bailout.
"In the last quarter we must achieve our fiscal targets, which is becoming more difficult due to a deeper recession," said Greek Finance Minister Evangelos Venizelos.
“Given all this it is hardly surprising that the yield gaps between Greek sovereign debt and their German equivalents have continued to widen out over the past weeks,” Derrick said.
“Unsurprisingly, our own flow data show a significant pick up in the pace of sales of Greek fixed income instruments in recent days. Add in a stock market that has lost 82 percent since October 2007 and the picture looks nothing short of disastrous.”