On January 26 2010, Greece sold EUR 8 billion of five-year notes, attracting orders worth EUR 25 billion, with foreign investors buying almost 75 percent of the securities. The apparent debt issuance success has turned for the worst one day after, when the 10-year government bonds tumbled, pushing the yield up to the highest since 1999. The bearish sentiment behind the sell-off was due to investors’ concern that Greece is not acting appropriately to fix the biggest budget deficit in the European Union. Financial Times reported that China turned down an offer to invest EUR 25 billion in Greek government bonds. The yield on the Greek 10-year bond went-up 49 basis points to 6.73 percent in Athens, with the spread against German bunds increasing by 50 basis points to 354 basis points, the widest since December 1998.
The credit default swaps on Greek government debt jumped 48 basis points to an all-time high of 373. Greece needs to raise EUR 53 billion in 2010 to fund the deficit, the equivalent of 20 percent of GDP. As described in the “Sovereign Debt Crisis” article, Standard & Poor’s, Moody’s and Fitch cut Greece’s credit rating after the budget deficit swelled to 12.7 percent of GDP. According to Bloomberg, Greek bonds have lost 2.34 percent this month, the worst performance in the European bond market. According to Markit, the new five-year notes tumbled in the first day of trading, with the spread on the August 2015 notes widening 32 basis points to 382 over the benchmark mid-swap rate.
Greece is facing the worst financial crisis in about 16 years and the attempt to avoid a bailout by the EU is hampered by out of control bribery and tax evasion. Prime Minister George Papandreou promised to fix the financial mess that has buried the nation in about EUR 300 billion. He has promised to slash the deficit by 2013 to less than 3 percent of GDP from 12.7 percent in 2009. The government proposed raising the tax on tobacco products to 70 percent and the levy on alcohol by 20 percent. Additionally they plan to freeze hiring and cut state employee bonuses by 10 percent, despite massive pressure from unions which prepare to go on strike on February 10 2010.
Judging on past sovereign debt crises, many traders are wondering how much external funding would be delivered to Greece before it defaults on its debts. Greece’s draft plans for reducing its deficit to 3% in three years did not seem credible to foreign investors. To address the issue, the local authorities should start a complete overhaul in the way the economic statistics are collected, ending years of political manipulation and false reporting. With regard to the chance of Greece getting bailed-out by the EU, the German finance minister, Peer Steinbrück said last year: “The Maastricht treaty does not foresee any help for insolvent states, but in reality the other countries would have to rescue those running into difficulty.” Leaders of the European Union will meet for an informal economic strategy summit in Brussels on February 11th, and the sovereign debt crisis will get top priority on the agenda.
Though, Greece only accounts for between two and three percent of Union GDP, the scariest thing is that a Greek meltdown could mean a severe blow to the very European idea of a common currency, and it could trigger a domino effect through Italy, Spain, and Portugal. At stake is the credibility of the euro, a currency union with a central bank but no central economy management.
Nice article Tony. Cute title too
Not clear if the EU will bail Greece out, but I think they should not. For two reasons:
1) the moral hazard it would create will eventually sign the death certificate to the common currency, and
2) some belt tightening is quite good simetimes -> only look at how well the Asian tigers have rebounded after the ’97 debacle. And if this tightening extends to Italy, Spain and Portugal, so much the better.
Romania most likely would be affected too, but this would probably be more of a blessing than of a curse.
Best,
Viorel
Viorel,
Long time no see. Meanwhile the Patriots are out of the playoff, Kindle got cannibalized by iPad and Obama’s state of the union address sent all of us earlier to bed …
With regard to this article, I am on the same side with you. If Greece went down the drain then many others would follow suit. Romania should sort-out the ballooning public sector spending, since IMF will not pick up the tab forever.
Toni,
What if really Greece defaults on its debt ? What happens next ? What is the way out ?
Daniel
Daniel,
It will be catastrophic for Greece. Then, a restructuring debt will follow in which some of the defaulted bonds are to be exchanged by others with a much lower face value.
Toni,
Thank you, now I understand. Believe it or not, one of my teachers couldn’t answer me on that one. “well, it will just default”
Daniel
Daniel,
Maybe I should come and hold a course there.
Toni,
That would be a great idea.
If that would be the case, I guess even all the “cocalari” and “pitipoance” would pay attention what you are saying even though they wouldn’t understand anything ! (Not that I understand 100% but still I do some)
In case you didn’t know, everybody in RO who doesn’t know what college to follow after high school, goes to “economic sciences” because “management” “banking” “sounds good” and all the subjects from above are “economics students”, some of them can’t do a % decrease but right now “studying” Monetary Economics and they will EVEN graduate ! They will be “Economists” … ridiculous !
Daniel
Good post, I can’t say that I agree with everything that was said, but very good information overall:)
Nobody is perfect.
Toni,
“Professor Feldstein says Greece’s only options are DEFAULT, leaving the EU, or BOTH.
“Today’s so-called Greek rescue package is the 6th? 7th? 17th or 27th? I have lost count. But no matter, another unfounded rumor is just fine with the computerized trading from Goldman Sachs and JPM. There are no shorts left to stop it but there are no buyers other than the computers either: each day is governed by ridiculously low volume and no volatility whatever, which is a sign of no/few new buyers.”
What does the article actually refer when saying “computerized trading from GS JPM” ? They use sofware/programming for trades at specific levels to be executed automatically or ?
Dany
Dany,
This is going on for a while. It is so-called “black-box machine trading”. The model is designed by a team of traders and quants, and the execution is done by the machine. I used to do this 10 years ago…but this days it is well advanced…
Toni,
Thx … 1) the exec is done by the machine for the speed of it right ? 2) then I cannot ask myself, what chance would any retail investor/trader have against all those “beasts” ?
Dany
Dany,
Who’s to say that those trades are the perfect trades. The whole trick is around the model. The machine provides a faster execution and a perfect discipline. That’s all …