Greek Deal Leaves Market in 'Uncharted Territory': Experts

The better-than-expected take up of theGreek bond swap offer, announced Friday morning, should help boost markets temporarily, but caution remains, analysts, strategists and economists warned.

A man removes paint from the sign of the central bank of Greece following demonstrations in Athens, Greece, on Monday, Feb. 13, 2012.
A man removes paint from the sign of the central bank of Greece following demonstrations in Athens, Greece, on Monday, Feb. 13, 2012.

“The market is not yet convinced that the glass is half full,” Hans Redeker, global head of foreign exchange strategy at Morgan Stanley, told CNBC.

Yields on the new Greek bonds could soar above 20 percent, according to the bank, which Redeker said indicated that the market is not really confident about the outlook.

Even though the bond swap has passed with 85.8 percent participation, it is still not sure whether the Greek government will call in collective action clauses to force bondholders who are holding out against accepting the deal to take it.

This will be announced later Friday after the Greek government consults with other euro zone members.

The issue of whether credit default swaps on Greek bonds will be triggered will be settled at a meeting of the International Swaps and Derivatives Association Friday at 2:00 pm CET.

“We are in uncharted territory here and there is danger,” Holger Schmieding, chief economist at Berenberg Bank, told CNBC.

“The statement suggests that the CACs will probably be triggered.”

European markets moved up slightly following the announcement, amid optimism that there would be a relief rally after the wrangling over Greece which affected markets earlier in the week.

“We expect to see a small relief rally this morning as this chapter in the Greek crisis appears to be coming to an end. The removal of the near term risk of a hard default is significant and should allow the market to focus more on the bigger picture,” Peter Chatwell, fixed-income strategist at Credit Agricole, wrote in a research note.

“Athens ought to be very pleased with this outcome,” analysts at FX Pro wrote in a research note. “Despite some real concerns in recent weeks over the extent of private sector participation, in the end this outcome surpassed even the most optimistic expectations.”

Passing the bond swap deal will give Greece access to the crucial bailout money from the troika of the International Monetary Fund, European Central Bank, and European Commission, which will help pay off the next instalment of its debts.

“The crucial element we need for this second support package to pass is getting the money from Europe rolling in. That looks likely to happen, unfortunately with some market turbulence around the CACs being triggered,” Schmieding said.

“We will likely get through this fairly well, thanks partly to the ECB.”

The ECB has boosted European markets this year through two three-yearlong term refinancing operations, its biggest-ever liquidity injection, which has helped reassure markets that there is some insulation if other peripheral countries fail.

The so-called “firewall” is not sufficient, according to David Watts, credit strategist at Credit Sights, who believes that the new money in the European banking system is “probably enough to cover Spain and Italy’s bills for a couple of years.”

“Once the money runs out, the market doesn’t know how euro zone governments will respond, whether there’s additional bailout money, or whether the market will have to face the same sort of restructuring deal that Greece has had imposed,” he told CNBC.

“As a bondholder now, do I want to buy Italian bonds with the possibility that in two years’ time it will run out of money? The private sector knows other people in private sector are getting worried, and will try to get out of their position first.”

Doubts have been cast over whether Greece, which is struggling with 20 percent unemployment and recession, can service its debt and start growing again if it imposes the harsh austerity measures demanded by the troika.

Schmieding said that the troika has to be prepared for some “fiscal overshoots” by Greece.

“Unless Greece gets back to some sort of decent growth level, this situation will repeat itself,” Ana Armstrong, chief executive of Armstrong Investment Managers, which has a small position in Greek bonds, told CNBC.

“This is just a temporary solution. The question is of implementation.”