EU Market Turmoil Strengthens Peripheral Credits

Ironically, the market turmoil in the EU peripheral bond markets this week will have the effect of forcing Europe’s hand to speed up implementation of the 21 July bailout accord. While bond markets are falling to ‘crazied distressed levels’ (six month maturity Greek bonds now yield over 100% annualised), Central Bankers and Finance Ministers can now clearly see the effect of their delay and dysfunction.

The market has wrongly interpreted the weekend’s electoral setback for German Chancellor Merkel as a potential block to the bailout accord’s enabling legislation. In fact, while some conservatives within her party question the Greek bailout, the opposition Social Democrats and Greens are in support and have promised quick passage of the Bill. The bailout will pass with almost unanimous support.

Likewise, Finland’s ‘roaring mouse’ routine has been neutralised by the IMF. And the so-called ‘IMF walkout’ last Friday was basically the (scheduled) repatriation of delegates to the US for the Labor Day long weekend!

So, why the panic? As noted in previous posts, Greek bonds have no natural buyers as the debt does not belong in any major indices. Sellers face a very thin market and prices can gap down at the slightest hint of stock being offered.

The fact remains, however, that the market turmoil will cause the EU to quickly pass the enabling legislation to permit the EFSF to start buying Greek bonds at distressed levels. This introduces a natural buyer to the market and reinforces the credit. These bonds look very, very cheap …