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Credit Insights

EU and Greece Deal Is Far From Done

Even if Greece successfully implements reforms, some bondholders may look to derail the exchange offer in the hopes of garnering better terms.

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Corporate credit spreads continued to grind tighter last week, but the pace of tightening has slowed significantly. The Morningstar Corporate Bond Index tightened a few basis points to +196, but as we cautioned a few weeks ago, we think the preponderance of credit spread tightening has run its course for now.

Over the next few weeks, we shall see if Greece is successful in its attempt to negotiate what is essentially a prepackaged bankruptcy and exit financing. If Greece is able to successfully pull it off before the March 20 bond maturity, then credit spreads could tighten up to 50 basis points, taking the Morningstar Corporate Bond Index back near its tightest levels since last spring. If Greece is unsuccessful, we expect the disruption to the markets could easily push credit spreads 50 basis points wider to where they peaked last October. While a hard default by Greece would certainly reignite the fears of credit counterparty risk, for a number of factors we have written about previously, we do not think it will lead to a systemic failure in the financial markets.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.