Thursday, April 8, 2010

Greek Financial Crisis Intensifies Threatening Sovereign Debt

Despite global efforts to contain the problems in Greece's fiscal situation, it appears that the crisis is accelerating and threatening to spill-over into the world financial structure. 

Greece sold €5 billion of 7-year notes on March 29, but since the issue, renewed concerns have caused the bonds to fall by more than 10% of face.  Yields on Greek's sovereign debt have jumped sharply.

Greek 10-year bond yields are currently trading with rates exceeding 7.5%, up about 1% in a couple of days.  Yesterday, yields on 2-year Greek bonds leaped more than 1.2%  to nearly 6.5%, an extraordinary daily move for any sovereign debt.

The move came amid concerns about the ongoing negotiations regarding rescue plans.

Greece has been unable to curtail speculation that it may default by failing to create a viable strategy to handle its growing budget deficit.  Concern is growing as to the terms and credibility of a European Union rescue plan, or one from the International Monetary Fund.

As a result, the interest rate spread Athens has to pay above German Bunds has reached nearly 4.5%, the highest level since Greece joined the Euro-Zone.

The rapidly rising yields reflect the deteriorating economic outlook.  A new forecast by The European Commission is expected to project a decline in the Greek economy this year by 2.5%,  versus prior forecasts of a contraction of 2%.

Eurostat, the European Union statistical service, estimates Greece's 2009 budget deficit exceeded 13% of Gross Domestic Product (GDP).  By comparison,  finance ministry officials said Greece was still on track to reduce this year’s deficit to 8.7% of GDP.

The crisis is taking its toll on Greece's banking sector.  Athens' 4 largest banks are seeking government support to help alleviate a liquidity squeeze resulting from a significant flight of deposits in the first 2 months of the year.

Finance Minister George Papaconstantinou said on Wednesday that the banks are seeking access to the  €28 billion ($37 billion) government rescue plan that was put together during the 2008 global credit crunch.

Rating agency Moody’s recently downgraded all 4 banks by one notch, noting Greece’s deteriorating economic outlook.

Greece will be seeking funding in the United States, after efforts to raise money in China and Europe were met with very poor interest.  Instead, Athens will seek to raise $5-$10 billion from U.S. investors to help fund its May borrowing needs of about €10 billion of upcoming debt maturities and interest payments.

Greece, which had attracted demand of more than €25 billion for its first bond sale of the year in January,  had been only able to attract €6 billion for its last bond sale at the end of March.

Global stock markets have declined sharply in the last day and early this morning on the renewed sovereign debt fears.

Despite pre-mature proclamations that the situation had been resolved, it's clear that the forces of depression and asset price contraction are continuing to exert a seriously adverse impact on the world financial structure.

Marko's Take

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  1. It's a farkin' mess, that's for sure. And our folks continue to fiddle while the fuse burns...

  2. Yup...and it's quite contagious...Iceland, the Baltics and the other weak countries all getting into sovereign debt probs...


  3. Marko,
    The Greek debt "bomb" keeps ticking, any time line to when it finally blows up? What will be clues leading up to that? Thanks, good work.

  4. Hi Anon:

    The upcoming road show in the US ought to be telling. If the deal gets done...then the situation will be handled temporarily. If the deal can't be sold, the bomb will go off.

    The yields on the bonds ought to tell us how placeable it is. Right now, the bonds yield in the 7-7.5% range. So, it doesn't scream default yet. If the bonds should exceed 10%, then...that would signal trouble.

    thanks for the comment!


  5. Thanks, as you might know, just today, downgraded to BBB- ........ keeps getting more interesting, thanks again


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