Greece has had trouble implementing the structural reforms demanded in exchange for aid. The large and rising debt/GDP ratio is also a function of the larger than officially (Troika) expected contraction in the Greek economy. The resolution achieved after protracted debate includes an easing of the debt servicing vis lower interest rates, deferred payments, and lengthened the maturity schedule.
Doubts expressed by the deputy leader of Germany’s CDU, questioning whether an official sector hair cut is embedded into the agreement may have weighed on the euro in an already offered market. Recall that Merkel has frequently had to depend on the opposition SPD to support her European agenda. A vote on the Greek deal, which could be taken before the end of the week may not be an exception.
An under-appreciated twist to the plot, however, comes from Ireland and Portugal. Recall that 2011 mid-year summit, European officials adopted a principle of equal treatment under the framework of the EFSF. Essentially, this means that consideration given to Greece out to applied to the other countries who are receive EFSF assistance, namely Ireland and Portugal.
Ireland and Portugal are consistently evaluated positively by the Troika, but are now required to have a more onerous debt servicing burden–higher interest rates and shorter maturities than Greece. Some market participants see the likelihood that the official sector restructures Ireland and Portuguese debt. Portugal’s benchmark 10-year yield has fallen 14 bp today, second to the 24 bp decline in Greece’s 10-year yield. Counter-intuitively, Irish yields are slightly higher on the day.