Greek Debt Crisis Become Critical (Again)

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.”

Wolfgang Münchau


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.

During the good years 1998/2007 the borrowed at 5%, while nominal GDP growth at 5% in Greece and 8% in Portugal.

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:

Lies, Damned Lies And Statistics

Greek Bailout “Backstop” Confidence Trick Already Backfiring

Markets To Test Greece

Greece Wants E.U. To Use Old Latvia Fund For Bailout

European Markets: Tumbling Dice

G7-Countries In Deep Trouble

Merkel: Kick’em Out!

Force The Rich!

Greece: “Exploiting The Fear”

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4 Comments

Filed under International Econnomic Politics, National Economic Politics

4 responses to “Greek Debt Crisis Become Critical (Again)

  1. Well, a good old motto from the Balkans is: If you can’t fix the problem with money, you can fix the prrrrroblem with more money.

    Well, they’ll get a loan, the Greeks… that is what the EU is there for. However, I hope that the governments will be smarter this time, and put security on the loan. I wouldn’t mind putting my savings on a greek bond if – in case not paid back in 15 years – I’ll get one of these fancy appartments in Santorini!

    JK

  2. Well, a good old motto from the Balkans is: If you can’t fix the problem with money, you can fix the prrrrroblem with more money.

    Well, they’ll get a loan, the Greeks… that is what the EU is there for. However, I hope that the governments will be smarter this time, and put security on the loan. I wouldn’t mind putting my savings on a greek bond if – in case not paid back in 15 years – I’ll get one of these fancy appartments in Santorini!

    JK

  3. Credit records are simply a recording of your debts and assets. Destiny Iva

  4. econotwist

    I think many Europeans share your view by now.
    Personally I believe a default probably is the best long term solution, anyway.
    A total clean up is what we need.

    Thank for the link.
    And for the visit 🙂

    econotwist