The yield on 10-year Greek bonds hit 7,1% Tuesday, as the spread compared to German bonds increased from about 300 to 400 bps. The yield on Greece‘s 2-year bonds shot up by an extreme 1,2 percentage points to 6,48%, as the financial markets are becoming increasingly concerned about the country’s ability to pull through the crisis. Some are absolutely certain that it won’t.
“The Greek government has demonstrated that it can still borrow at a rate of about 6 per cent but if you do the maths on the public debt dynamics, as I did recently, it would be hard to arrive at any other scenario than an eventual default.”
The extreme moves in pricing of Greek debt reflects the financial markets rising uncertainty surrounding the probability of a default by the Greek government within the next two years. Greece has covered its funding for April, but needs to borrow another €10 billion in May.
One reason for the rise in the bond yields are reports of a strong difference of views between Germany and the other euro area members of which interest rate to apply to a rescue package.
The Germans are indeed insisting on market rates – which effectively means no subsidy at all.
The Financial Times reports that most euro area member states would be ready to offer loans with rates of 4-4.5%, the rate currently paid by Ireland and Portugal. But Germany insists on 6 to 6.5%. The only relief Greece can expect is from the IMF’s standby arrangement, which should allow Greece to borrow at rates of between 1.25% and 3.25%.
The maximum possible funding ceiling is €30bn, with the IMF to contribute no more than one third.
Greece has now decided to tap the US market to raise further capital, as European investors are becoming increasingly skeptical.
Bloomberg reports that Greece is likely to receive a lukewarm reception in the US, where investors are likely to demand a 7.25% yield for Greek 10-year dollar bonds, 410 basis points more than German bonds. (Bunds)
The Greek public debt management agency is preparing a road show in the U.S. a head of a sale of as much as $10bn in new bonds.
Bloomberg also noted that at a spread of 400 bps over U.S. Treasuries, Greece would be “selling debt at a yield premium similar to those demanded from junk bond issuers like the home- shopping channel QVC.”
“The Germans Are Racists”
Greek deputy PM Theodoros Pangalos complained that Germany in particular took a moral interpretation to the Greek crisis. In an interview with a Portuguese newspaper, he said (translation):
“Why do the Greeks have problems? Because of a good climate, because of music, drinks, and due to the fact that they are not as serious as the Germans… This a moralizing viewpoint, racist even, that does not correspond to the reality.”
Le Monde reports that there was no comment from the German government.
Greece Will Default
In his FT column Wolfgang Munchau argues that Greek will eventually default, though not this year.
The reason is a debt dynamic so severe that, without a bailout, there is no chance that even the toughest restructuring effort could succeed.
In the past, adjustments of such magnitude were achieve only by countries that benefited a devaluation, Munchau points out.
“I am willing to risk two predictions. The first is that Greece will not default this year. The second is that Greece will default. The Greek government has demonstrated that it can still borrow at a rate of about 6 per cent but if you do the maths on the public debt dynamics, as I did recently, it would be hard to arrive at any other scenario than an eventual default,” he writes.
According to Wolfgang Munchau, five things can now happen to resolve the situation:
A massive global and euro zone economic boom (unlikely); cheap loans (ruled out by Germany), private sector debt restructuring (possible, but probably not sufficient on its own), Greece leaving the euro zone (not a sensible choice for Athens, nor a legally policy policy option for the others), and default.
Munchau says default is the only option that is consistent with what we know.
Debt Deflation In Southern Europe
Les Echos commentator, Jacques Delpla, makes the point that one forgotten aspect of the Greek crisis is the level of private debt in Greece, Spain and Portugal, where annual external deficits are exceeding 10% of GDP.
He invokes Fisher’s debt deflation theory that the combination of private-sector debt deleveraging and disinflation/deflation could prompt a vicious circle.
The rise in indebtedness was thus painless. While wage costs rose by 2% in Germany during the 1998 and 2008 period, they went up by 20% in the euro area average, 41% in Spain and 45% in Greece.
Related by the Econotwist:
The H5F-TV Toolbar; built-in radio- and TV channels, news ticker and email notifier.
Free Download Here:
Related articles by Zemanta
- Greece’s Situation Worsens (benzinga.com)
- Greece May Find Lukewarm U.S. Response to Dollar Bond (Update1) (businessweek.com)
- Euro falls on Greece debt fears (news.bbc.co.uk)
- Greek Bond Yields Soar as Investors Sell (nytimes.com)
- Simon Johnson: Greece and the Fatal Flaw in an IMF Rescue (huffingtonpost.com)
- Greece set for U-turn on hedge fund policy (telegraph.co.uk)
- Greece battered on markets, denies u-turn on IMF (financialpost.com)
- Cost of Greek borrowing soars (thestar.com)
- Greek Bond Yields Rise to 7.1% (online.wsj.com)