Markets underwhelmed by Greece’s program exit

While Greece’s exit from its latest bailout program on Monday constitutes a milestone for the Greek government and its European creditors, the day is mostly being treated as symbolic by international markets, with analysts arguing that several reforms are still needed to improve the Greek economy.

The European Stability Mechanism (ESM) noted in a press release on Monday that it will continue to monitor Greece closely using the Early Warning System that ensures the country remains on track.

“For that purpose, the ESM will receive regular reporting from Greece and will join the European Commission for its regular missions under the enhanced surveillance framework,” the ESM said.

At the same time, the effects of political and economic uncertainty in Italy and Turkey on Greek paper is seen as proof that the country’s bonds remain highly vulnerable to external turmoil.

The Greek bond market didn’t seem to “celebrate” the end of the adjustment programs on Monday, remaining mostly unchanged. Greek 10-year bond yields slid to 4.33 percent, but remained at a two-month high with the spread hovering at 402.2 basis points.

The yield on the 5-year bond rose to 3.318 percent, up 1.7 percent from Friday’s level, while the the 7-year bond yield reached 3.881 percent, having risen substantially from its 3.5 percent yield on the day of its February issue.

According to several analysts, the political and economic situation in Turkey will continue to affect Greek bonds negatively.

Constantinos Zouzoulas, managing director of the Research Division of AXIA Ventures Group, says Greece will have to regain market trust both through political initiatives as well as the country’s gradual return to the international markets.

However, in the short term and despite the completion of the program, government bonds will continue to be affected by the turmoil in neighboring countries, he said. This is because Greece, though it has no immediate exposure to Italy or Turkey, is considered a weak link.

Carsten Hesse, European economist at Berenberg, added that Greek banks have very little exposure to the neighboring country and bilateral trade is limited.