Wednesday, April 7, 2010

Watching the Greek tragedy -- 10 year Greek bond rates

The Greek Tragedy is not over, even with 'assurances' by the EU and IMF they stand ready to help.  If you'd like a front row seat to events and watch what everyone else is watching I suggest you keep an eye on 10 Greek bond yields.  While yields spiked and fell back earlier this year they have begun creeping upwards.  If they continue upwards this will eventually precipitate another risk-off selloff in the markets.

The recent debt auctions by Greece have been met with lower bid / cover ratios and lower foreign participation. 

Non-domestic investors accounted for 80 percent of purchases of the first bond in January, 77 percent of the second, and 57 percent of the third. Reuters
While the Greek issue has slid back off the front burner it has not been resolved.  Abrose Evans-Pritchard has an interesting blog post about this very issue recently and his conversation with Carmen Reinhart regarding the slow motion trainwreck that is Greece:

But I digress. Professor Reinhart said Greece cannot hope to escape from its debt trap under the current EU austerity plan. The cure of devaluation is blocked by EMU membership. The restrictive monetary policy of the European Central Bank — a contraction of both M3 money and lending to firms, record low core inflation — must inevitably unleash deflationary forces in Club Med states already trapped in credit busts.
A country can in theory deflate its way back to competitiveness by an `internal devaluation’, ie relative wage cuts, in this case by 20pc to 25pc . . .
On a parting note, Professor Reinhart says the only budget deficit that matters in a crisis is the “cash deficit”, and this reached 16pc of GDP in Greece last year — not the 12.7pc officially registered under “accrual” accounting.
As countries near default, they typically find all kinds of way to disguise their troubles, by shifting debts between government agencies and delaying payments.
“In the end, everything comes out of the woodwork. You realize that it is even worse than you thought,” she said.
Greece is seriously behind the 8 ball and faces tough choices with no easy solution.  They can either drastically cut spending and face a severe recession, accept IMF/EU austerity and lending support, or even default and leave the Euro. I think the last option is least likely but I'm not making any bets for a positive outcome regardless of what happens.

Carmen Reinhart has a recent  interesting paper regarding country growth rates declining as debt/GDP levels rise.  I am currently reading the book she co wrote - This Time is Different and the paper is an excellent primer to the detailed description in the book. Read the paper and then consider buying the book.

The pragmatic capitalist also has some video by MIT professor Simon Johnson about the Greeks.

The locals are also fleeing the Greek financial system.  From the Telegraph:  (ht Zerohedge)

More than €3bn (£2.6bn) of deposits held by Greek households and companies left the country in February, while in January about €5bn of deposits were moved out, according to the latest figures available from the Bank of Greece.

Switzerland, the UK and Cyprus have been the largest recipients of the money, with the wealthiest Greeks looking to move their deposits to Swiss banks accounts to escape the more punitive tax measures many fear will be introduced in the wake of the country's economic crisis.

It's never good when the locals start pulling money out of the banks. . . .

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