Why isn't the stock market more excited about the Greek debt deal?

07/22/2011 12:09 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

It’s a deal! The Greek debt crisis is over! Euro saved!

But you might have noticed that European stock markets aren’t up appreciably this morning. While the headlines are blaring news of the deal, the French CAC 40 index was up just 0.2% as of 10:15 a.m. New York time. The German DAX index was down 0.02%. The wider Euro Stoxx 50 had inched up just 0.01%.

Why not more excitement?

Partly because everyone is waiting to see if the ratings companies and the body that coordinates credit default swaps rule that Greece has defaulted on its debt. Fitch Ratings has already weighed in via e-mail saying that if the plan were implemented, it would amount to a “restricted default” on Greek debt. The plan, Fitch calculates, would amount to a 20% reduction in net present value for holders of Greek debt. I’d bet that Standard & Poor’s would rule the same way and call it a “selective default.” (Moody’s Investors Service doesn’t seem to have an equivalent rating to “restricted default” or “selective default.”

Nobody is quite sure what a restricted or selective default means for the financial markets. For example, would a selective default trigger the payouts guaranteed to buyers in the credit default swaps market? If so, a lot of sellers of this kind of “insurance” will be forced to pay up, and nobody is quite sure what institutions are on the hook for how much. As odd as this may seem, that issue will be decided by a vote, probably early next week, by the International Swaps and Derivatives Association. The betting now is that the group will decide that the plan doesn’t trigger a credit event and doesn’t require a payout on these swaps. But still no one knows for sure.

And partly because no one knows if the deal will end the risks of the debt crisis expanding to include Italy and Spain. Look at the bond market reaction to see what I mean. The yield on Greek two-year notes is down 7.76 percentage points to 26.05% today. But the yield on the Italian 10-year bond is down a more modest 1 percentage point to 5.33% and the yield on the Spanish 10-year bond has barely retreated at all, falling just 0.04 percentage points to 5.69%.

In other words, the early market reaction is that the deal may have saved Greece—for the moment—but no one is quite sure that it has put an end to the euro debt crisis.

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