Monday, April 26, 2010

Greece: Going, Going... Gone

In early trading today, Greek bond yields exploded.  Two-year Greek bonds surpassed the 14% yield level -  a 4% jump in one day.  The 10-year bond approached 10%.

Greece has activated a $60 billion bail-out from the International Monetary Fund at rates of 5% and below.  The jump in Greece debt yields suggests a market belief that the bail-out, even if implemented, will be insufficient to stem the crisis.

In addition, the yield curve is now "inverted" (short-term yields exceeding long-term yields) indicating an evaporation of liquidity, which will surely translate into more severe economic hardship

Comments from Germany’s foreign minister Guido Westerwelle on Monday saying the German government has not yet committed to providing financial aid to Greece, also didn't help.

When asked about Germany's intentions toward providing assistance to Greece, Chancellor Angela Merkel has continually vascillated, a trait she is now becoming famous for.

Domestically, a German assistance plan for Greece is highly unpopular.  The majority of the Germans believe they are rewarding Greece for cheating itself into the Euro, forging its balance sheets and then spending a decade living beyond their means while the German workers had to endure a painful period of restructuring and wage freezes.

The German Chancellor also emphasized that the decision to grant aid to prevent a Greek insolvency would be made only after Greece committed to a rigid deficit-reduction plan for years to come.  "These discussions are ongoing," she said.  "Greece has to accept harsh measures for several years."

Italian Foreign Minister Franco Frattini expressed concern about Germany's "intransigence" over Greece, saying a quick rescue operation is needed to support the Euro's stability.

Opposition parties blame electoral politics for Berlin's lack of haste to help Greece.  Ms. Merkel's CDU party faces a tight regional election in the state of North Rhine-Westphalia on May 9.  With German aid for Greece deeply unpopular in Germany, early commitment to bail-out the debt-burdened Mediterranean country could change the minds of some voters and could cost Ms. Merkel her majority in the upper house of Parliament.

Greece has said it wants aid from the joint EU-IMF loan mechanism to be made available within days of its formal request, which Athens made Friday.  Spokespersons for the EU and IMF indicated that the response could be "positive or negative".  The trading in Greek debt indicates an expectation of a thumbs down.

Marko's Take

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On the contagion side, the cost of insuring Portuguese government debt against default jumped to a record high of 288 basis points on Monday versus 278.8 basis points on Friday, according to Reuters.

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