According to a once famous statement by the British Prime Minister Harold Wilson, a week is often a long time in politics. But when it comes to financial market crises we seem to follow a pattern more reminiscent of a line from the Dinah Washington version of an old MarÃa Méndez Grever song: “What a difference a day made”. The day in this case was last Wednesday, at least for those of us here in Spain, since it was on Wednesday that the ratings agency Standard & Poor’s downgraded Spanish Sovereign debt to AA from AA+. As a result the cost of insuring such debt using credit default swaps (CDS) surged at one point to a record 211 basis points according to CMA DataVision prices. Contracts on Greece and Portugal also rose sharply, with Greece climbing 42 basis points to hit 865.5, while Portugal jumped 20 to 406.
Standard & Poor’s justified their Spain downward revision by referring to their medium-term macroeconomic projections. In particular the agency cited heavy private sector indebtedness (of around 178% of GDP), an inflexible labor market (they expect unemployment to remain around 21% throughout 2010, but then continue at a very high level for half a decade or so), the country’s fairly low export capacity (Spain’s exports only amount to around 25% of GDP) and the general lack of external price competitiveness. All these factors they feel are likely to mean that Spain will have low growth between at least now and 2016, a factor which will make the combined burden of private and public indebtedness much harder to service.
And despite the fact that Spanish Deputy Finance Minister Jose Manuel Campa stepped forward to say he was “surprised†by the move, arguing they are based on overly pessimistic growth forecasts, the fact is it is very hard to disagree with the S&P conclusions, as investors across the globe well understand. Even the EU Commission recently responded to Spain’s Stability Programme by stating that the growth forecast it contained was far too optimistic, and the IMF are even more pessimistic than the Commission.
In fact, it now seems that the present Spanish government seems to be becoming more and more isolated from Spain’s financial and corporate establishment with every passing day. As Victor Mallet points out in today’s Financial Times, “it cannot be often that academic economists use pictures of Omaha Beach, site of the bloodiest fighting in the 1944 Normandy D-Day landings, to illustrate their conclusions about one of the world’s medium-sized industrial economies”, but this is precisely what the prestigous Barcelona-based Esade business school’s latest economic bulletin did in their “H-Hour for the Spanish economy†editorial. “The diagnosis is very serious,†they said. “This is a highly indebted country with a damaged income-generating mechanism.â€
Now even if one does not entirely go along with the whole analysis they offer of the roots and remedies for Spain’s malaise, there can be no doubt that they now take the situation very seriously, even if one could lament that they did not begin to do so starting in August 2007, when the wholesale money markets first closed their doors to the increasingly toxic products that were being issued from within the Spanish banking system. The warning signs were already there, and were plain to see, although, unfortunately few inside Spain were able to do so. As a result, nearly three critical years have been lost, dithering around, large quantities of public money have been wasted, and what was a private sector external indebtedness problem has now been transformed, little by little, into a fiscal crisis of the state.
If the Spanish economy is really to be put straight, and not simply go straigh back and recidivise (after whoever it is who will do the “bailing out” finally does it), then surely one major priority during the coming national soul-searching process must be for public opinion leaders to find the ability and the courage to speak openly and clearly about the Spanish economy’s “inner secrets”, and the strength of character needed to publicly recognise problems in order to be seen to address them in a proactive and not a reactive fashion – to be out there in front of the curve, and not constantly trailing behind it. Put another way, it’s high time Spain’s bank and financial analyst community finally came out of the closet.
And if that all important international investor confidence is to be once more regained then it is important that those in the Economy Ministry are seen to be aware of the problems they face, and not simply reduced to the role of “marketing department” for a government which finds itself in ever deeper difficulty, caught between the rock of its own voters, and the hard place of the international financial markets. If you don’t like having rating agency downgrades, then do something to avoid them before they inevitably come. But what was it Mr Zapatero was saying only yesterday, oh yes, he personally can see “signs” the Spain’s economy Spain is at long last “improving”, that the “worst is now behind us”, or as Miguel-Anxo Murado so ironically puts it in the Guardian’s Comment Is Free: “all repeat after me, “Spain is not Greece””. I’m not sure who it is the Spanish Prime Minister currently has interpreting the signs for him – it is certainly not Perdro Solbes, or David Vergara, or Jordi Sevilla, or indeed Carlos Solchaga – but it seems far more likely to me to be one of Spain’s renowned Gypsy palm-readers than any reputable and internationally recognised macro economist.
In fact, as I have often stressed (and as Paul Krugman makes plain yet again here) Spain’s problem is not essentially a fiscal one. Spain’s problem is one of very high levels of corporate and household debt, and how Spain’s banking system is going to support these during the long economic downturn and the ultra-high unemployment the country now faces, especially as a growing number of unemployed steadily lose their entitlement to unemployment benefit. The problem is not only that unemployment is currently running at 20%, but that benefits only last two years (plus an emergency six month flat rate 426 euro monthly payment extension), while many forecasts are now showing unemployment in the 16% to 20% range in 2013 or 2014. Just how are all these people going to continue to pay all those mortgages?
So it is not simply that “public sector borrowing is aggravating external debt and leading Spain towards high-risk territory”. This is happening, as Spain’s most high profile and most strategic export increasingly becomes government and bank paper, but this is the aggravating factor, and not the root cause. The principal reason why Spanish debt is steadily moving into high risk territory is the continuing state of denial to be found among the Spanish decision making elite, and the absence of any credible plan that is up to the magnitude of the challenge ahead. Confidence has now become the main problem, but not the confidence of those consumers who rationally decide to keep their money in the bank (to earn those very attractive 4 percent interest rates those banks who now anticipate having difficulty funding themselves in the wholesale money markets are offering) rather than going out and spending it.
The real issue is to be found in the confidence (or lack of it) those who Spain and its banks owe money to that the country (as a whole and not just the government) is going to be able to pay it all back. And in this context the sea change in mentality that Victor Mallet describes – assuming it is maintained – will be crucial. Those of us with rather longer memories – ones that stretch back to January for example – may wonder whether, once the immediate pressure is off, all that new found national resolve may not simply drift back into the mists from which it emerged, as has happened only too often in the past. Maybe the simplest and quickest way to help everyone feel comfortable that this was not going to happen would be to call in the IMF now, not becuase a bailout loan is needed yet, but as David Cameron is suggesting in the UK case, to carry out a “no holes barred” policy audit, so that everything which should be transparent actually is.
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Of course the problems which became all too apparent on Wednesday went well beyond Spain. Along with the CDS prices, bond spreads widened all across the European periphery – with Spanish, Greek, Portuguese, Italian, and Irish yields all widening in tandem. Yields on Greece’s two-year bonds briefly even hit an incredible 21%, following Standard & Poor’s downgrade of the country’s sovereign debt to junk status the day before.
All of this and more finally forced the EU’s hand, and officials had to go rushing to the microphone to reassure investors that Greece would soon be able to access an aid package, with German Chancellor Angela Merkel going so far as to state that talks about providing aid should now be accelerated.
Then the numbers started to be filtered out, and evidently they were much larger than many had been expecting. According to press reports IMF chief Dominique Strauss-Kahn told German policymakers that Greece might need EUR120-130bn over three years, a number which the German press quickly calculated would mean that the German contribution might then go up to EUR25bn.
Certainly, at the point of writing we still don’t know what the exact number will be – and it is not even sure they have decided yet – but the reality is that once the EUR120-130bn number is out there from an authoritative source, it will be hard not to hit it, if not exceed it.
Then followed the announcement that IMF staff have reached an agreement with the Greek authorities on a 3-year program that will include draconian fiscal cuts (of the order of 10pc of GDP) and a series of structural measures aimed at driving nominal wages lower, reforming the pension system and building better institutions. Thus, the message this weekend to investors is: stop worrying about Greece for the next three years; you can continue to speculate in the secondary market, but the Greek government will be fine. And debt restructuring with the private sector now seems to be off the table for, at least for as long as the Greek government stick with the conditions – which will obviously be the aspect to watch carefully going forward. And even if there is an eventual default, the main counterparty will be other European governments (and the taxpayers who back them) and not private bondholders.
On the other hand, Europe’s institutions have, at a stroke, opened themselves up to a large slice of what is known as “moral hazardâ€, since the implicit message is : what we are doing for Greece we’ll do for any other Euro-zone country, if needed. So from this moment on, we are all in up to our necks, if not beyond.
This “historic moment” point-of-no-return dimension did not escaped the notice of Dominique Strauss-Kahn either, since following his meeting with German politicians he was at pains to stress the potential contagion affect lack of backing Greece to the hilt would have had on the euro and the rest of Europe in the days to come. “I don’t want to hide behind a rosy picture. It’s not easy,†he said. All this “ can also have consequences far away. We have to face a difficult situation. We are confident we can fix it… But if we don’t fix it in Greece, it may have a lot of consequences on the EU.â€
Highly respected US economist and Harvard University Professor Martin Feldstein went even further, saying that in his opinion Greece will eventually default on its bonds and he feared other euro-area nations may follow, most probably Portugal. “Greece is going to default despite all the talk, despite the liquidity package,†he said. Portugal’s name is mentioned frequently these days, since although the government deficit and debt levels are lower in Portugal than in Greece and the Portuguese government has much more fiscal credibility than its Greek counterpart, when you add private sector debt to the public part the number is not far short of 300% of GDP, and in fact the underlying problems are very similar to those which are to be found in Greece.
But it isn’t only in the South the the EU has to worry, since probems in the East continue to fester. The Hungarian forint had a fairly hard time of it over the past few days, and had a two-day intraday loss 3.6 percent on Tuesday and Wednesday, its biggest such fall since March last year. At the same time the cost of credit default swaps on Hungarian debt rose 23.5 basis points to 240. The drop followed revelations from Hungary’s incoming Prime Minister Viktor Orban that the country’s underlying fiscal deficit had in fact been rather higher than the previous government had acknowledged. So contagion may now be also moving Eastwards, meaning that EU institutions may now increasingly face a battle on two fronts, since the wobbling won’t simply stop with Hungary, there is Latvia, Bulgaria and Romania to also think about (just to name the first three that come to mind).
As Angel Gurria, OECD Secretary General, said this week: “This is like Ebola. When you realise you have it you have to cut your leg off in order to survive…… it is contaminating all the spreads and distorting all the risk assessment measures. It is also threatening the stability of the entire financial system.â€
Thanks for this comprehensive paper. There are two mistakes that the main stream media keep making and that should be corrected:
1. If Greece had been bailed out earlier (e.g. February) it would have been less costly.
2. Bailing out Greece will avoid contagion to the other PIIGS.
Both are complete nonsense. The numbers on the Greece financial books are the same than what they were 3 months ago (or 1 year ago, give a take a few billions, for that matter). Like a doctor carefully unveils the truth step by step, the hair rising reality of the Greek situation was unveiled slowly – but was always there. We seem to have here a particularly bad case of ‘What I haven’t discovered yet doesn’t exist’.
Likewise the financial situation of the other PIIGS exits independently of what happens to Greece. Greek bailout or no, the next dominoes will fall because, ahem, they fell already. They fell a long time ago when the suicidal levels of public / private debts were allowed to explose.
Some logic should follow. Some questions should be asked.
– What will be the seniority of the EU bailout money? A German politician spilled the beans by stating that the money will not be reimbursed. As Greek problem is solvability, not liquidity, this has an unfortunate ring of truth. It seems that the bailout will simply delay what cannot be avoided.
– What will the EU do when Spanish private and public debts come under fire? There is simply not enough EU money for it.
– Talking of a toxic mix of public and private debt, the United Kingdom is no better than Portugal. As UK is not in the Euro, it has been able to devaluate by 25 % and print money on a Napoleonic scale. Do these actions save the situation or simply delay the reckoning?
One way or the other, there will be debt defaults. What we don’t know is who will start. As most of the available medicine and care are being given to Greece now, it probably won’t start there.
Edward says that “the fact is it is very hard to disagree with the S&P conclusions (about Spanish debt rating), as investors across the globe well understand.” How wrong can he be? It is actually very easy to disagree with S&P: The other two rating agencies, Fitch and Moody’s do. Both of them rate spanish debt with the same grade as Germany, Netherlands, Luxembourg, Austria or France:
http://www.xe.com/news/2010/04/28/1108741.htm?utm_source=RSS&utm_medium=TL&utm_content=NOGEO&utm_campaign=News_RSS_Art3
Of course, having a lower Debt/GDP rate than the european average, using less percentage of the GDP to serve it (because of historical low interest rates) than ever before, growing faster than the average in europe (last year 1.5% points above Germany), etc, etc, helps to maintain that high score.
Facts, Edward, facts.
The idea that a country that has its debt subscribed in its own currency will default is preposterous. It is exactly as fearing that the world is going to run out of ink and paper.
Being Greece inside the euro its government can use all of its income to pay back its debt. If it were outside it would only be able to pay back with the income from its external sector. Bond holders would really be in dire straights in that case.
The biggest help packages being put forward (120 billion euros) dwarf against the GDP of the euro group of countries; it is less of 1% of total output. Europe produces that amount twice every week. Compare that against help packages that the USA or the UK had to arrange to sustain its economy and it is a laugh. Hey, is less than a quarter of the help that just two british banks received only 18 months ago. And, hey! the british government has already made a paper profit out of that!
Of course scare mongering is very profitable industry and has to feed in something.
What have the rating agencies done over the past two years to regain our trust?
When it came to private debt, they were too little, too late. For public debt they are too much, too soon.
Unfortunately, the story about euro trap is still hidden for large parts of it. Edward mentions next problems in CEE – “Latvia, Bulgaria and Romania”. But they do not have EUR as their domestic currency. They have just pegs which are impossible to explain why they are kept still alive.
Austrian Standard clearly states that in the case of Latvia it has been the imperative of the EU to keep the peg. http://derstandard.at/1271375596024/Die-zwei-Gesichter-des-IWF
The regain of competitiveness by Greece, CEE etc. is a danger of many dimensions higher for Germany, Netherlands & Co., as some billions in expensive loans to Greece.
Perplexed in Montreal –
“1. If Greece had been bailed out earlier (e.g. February) it would have been less costly.”
Yes – if Greece had been bailed out earlier, it would have been less costly. The wider spreads were allowed to grow, the more nervous the market became, the more it took to calm the market, the costlier the bail-out has become.
“2. Bailing out Greece will avoid contagion to the other PIIGS.”
Well, I believe that’s exactly what’s going to happen. Greece will be bailed out and the contagion will stop – because the markets will no longer fear a default in the short-term.
Jerónimo –
“The idea that a country that has its debt subscribed in its own currency will default is preposterous. It is exactly as fearing that the world is going to run out of ink and paper.”
Except that Greece has given up control of its monetary policy to the ECB.
Certainly rating agencies are not popular these days. But by choosing a day of already high turmoil for degrading Spain (based on long-term trends, not on an immediate trigger), and thus giving the impression of increasing turmoil, S&P might have done themselves a disservice. Maybe rating agencies have become too tone-deaf.
Joe, thanks for your reply. I think we have different analysis.
1 – The amount of the Greek bailout is the amount that debt markets should have provided but don’t want to anymore. It is the sum of the amount of the debt that must be rolled over while debts markets are shut down plus the amount of new debt that results from the current deficit during the same period. The only variable here are the shutting down period and the deficit. Would an early bailout have changed any of these variables? Greek debt market shut down when people realized that Greece would not be able to reimburse its debts (i.e. that Greece is not illiquid, but insolvent). A bailout, early or late, does not change this insolvency reality. It simply postpones the default.
2 – We shall, unfortunately, see. A Greek bailout does not change the reality of the Spain, Portugal, possibly Ireland, or UK financial situation, which is: Debts are too high to be repaid.
Regarding the euro-pegged CEE countries, it seems they have the worst of two worlds. They suffer like euro members from euro membership but can’t, like the UK, enjoy the benefits of being outside (the valuable benefit of devaluation and the more dubious benefit of money printing).
To Joe Litobarski:
“Except that Greece has given up control of its monetary policy to the ECB.”
That does not change anything, at worst it is a premium: their debt is in the same currency as the government income. Is not like getting Dracmas and paying Euros. It is getting Euros and paying Euros. All its economy is behind the government debt paying revenue, not just its external sector. At the same time they can be sure that that currency will have stability and will not devalue as a local ‘self controlled’ currency would, increasing their debt automatically in the process, if they had control of their own currency.
PiM,
I think where I disagree with you is that I believe it does make a difference whether Greece defaults now or in three years.
1 – The markets are refusing to buy Greek bonds because investors believe that Greece might default. The bail-out removes that threat for the next three years, so if the bail-out had been earlier then the market would not have shut-down for so long.
Also, Greece is now being charged higher interest on new debt because spreads have been allowed to widen thanks to the uncertainty.
2 – I think it’s a question of timing. The Greek crisis comes at a time when the Eurozone is just emerging from recession. In three years time, if Europe can build on its current growth, then the impact from a Greek default would be less severe. The bail-out is buying us time, but that is exactly what we need.
Jerónimo,
There is no cash in the Greek economy, and on May 19th Greece will have to pay several billion euros it does not have. If it is not bailed out then I don’t see what alternative it has but to restructure or reschedule.
Joe,
???
No cash in the Greek economy?
Have they resorted to Barter?
I am sorry but that kind of loony asseverations completely disqualify your argument.
Look, Italy has $1,980 billion of total outstanding public debt against $380 for Greece. On May 19th Italy will have six times more debt expiring than Greece, they do not have that kind of money in cash, as no government in the world does have the money to wipe its own debt overnight. They will simply sell more bonds as Greece will. And very good bonds as well, with a beautiful spread and a very stable currency behind.
Jeronimo,
Fine, I’ll put it this way – the Greek government has a liquidity problem (and is possibly insolvent). It has to pay 8.5 billion euros by May 19th, and it does not have the money to do so. Very few people are trading in Greek bonds because investors believe the Greek government is going to default.
If it cannot raise the money by May 19th, it will be forced to restructure.
P.S. You are right – there is cash in the economy. What I mean is the government has no cash – and it cannot sell bonds to raise more because nobody is buying.
How many times has to happen for people to understand that liquidity problems are not problems?
Eighteen months ago no one would buy Citi shares or RBS’s or Lloyds’s. Now the US and UK governments are seating on multibillion dollars paper profits simply for writing a big number on a piece of paper. The european economy can put 1% of it’s GDP as collateral written on a piece of paper without batting an eye and wait for the profits to come walking in.
http://www.guardian.co.uk/business/2010/apr/26/loyds-bank-royal-bank-of-scotland-profits
http://economictimes.indiatimes.com/news/international-business/Treasury-to-start-sale-of-Citi-stake-exit-bailout/articleshow/5861696.cms
PS: If there is money in the economy then the government has money. Every transaction has VAT attached, every income has taxes pending. And all that money is in the same denomination as the debt.
Jeronimo,
The Greek government cannot raise enough money through taxation by May 19th to meet the deadline. It cannot raise money by selling bonds because nobody is willing to buy them. It cannot print money because it has no independent monetary policy. It cannot bail itself out because it has no money.
The only options left are:
1) EU/IMF bail-out
2) Leave the Euro
3) Restructure/Reschedule/Default
It also cannot devalue.
Joe,
2) immedialtely induces 3), because ether there is run on banks, or the credit system collapses and arising from that the whole economy. This will happen in a pair of hours.
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govs from Latvia,
I completely and absolutely agree with you. See my post here: http://www.joelitobarski.eu/the-euro-a-federalist-dream/
Greece could also introduce Drahma as a parallel currency. This will not solve private debt problem, unless there is a conversion at large, but this could solve part of sovereign debt problem.
In 90-ies many of CEE had some sort of parallel currency reality, where cars and real estate were traded only in USD. These systems functioned surprisingly well.
Jeronimo: if things were as you say, then why the greek government is asking for a loan???
What would be the point of re-introducing Dracma?
Unless Greece would want its debt to multiply by who knows how much the minute the Dracma would devalue and would like to depend only in their exporting sector to repay their debt.
Would that go in the interest of Greece?
Would that go in the interest of the Greek bond holders?
Would that go on the interest of the Euro and Euro-bonds credibility?
No, no, and no.
Greece will emit more bonds, as Italy will and as all governments do when their bonds are due. The Greek government CAN raise enough money by 19th May because it is backed by the ECB and that kind of money is peaunuts for the euro economy and is just a number in a piece of paper for the ECB, as I have repeated many times now.
Jeronimo,
You mean the nuclear option? My God, man… the inflation… the inflation…
First, Greece could convert the EUR bonds to Drachma bonds and repay in Drachmas. This will be politically correct haircut. But not a full blown default.
Secondly, Greece could then regain competitiviness at the same time avoiding extreme depression and the scenario of Latvia with 23% unemployment. Because public sector salaries and pensions would be paid in Drachmas.
the exit strategy for the euro debt problem will not be resolved until the exit strategy for the US debt problem is resolved. Meanwhile, I predict the ECB will print money along the same lines as BoE, Fed, BOJ. The euro will sink and then sink some more, like sterling the past year and a half.
ofc this can go on for some time but will eventually come to a head when investors decide they want to punish the US treasury (certainly the US will move to offset the appreciation of their currency that results). At this point, these investors have nowhere left to go (which is the sole source of their power) and a long term ‘deal’ of a somewhat radical nature that works for the US, EU, japan and UK can be hatched without reference to what bond investors think.
This will be my last response because this is getting rather silly.
gov,
Are you mad? Do you really think that a party can change the denomination of a bond? Why didn’t Argentina think of that and put all their dollar debt in pesos?
joe,
What are you talking about? Is there any inflation threat in the US or in the UK after their bail outs or their quantitative easing? And, I repeat again, we are talking about 1% of the european GDP, not about 100% or 150% of their GDP in liquidity as those governments put on the table 18 months ago.
Dannyboy,
The US does not have any debt problem: Its debt is in their currency. There is no threat of default ever as long as there is ink and paper. China will very happily buy any american bonds just to make sure that its currency does not revalue and become uncompetitive against an undervalued dollar.
jeronimo, of course the US has a debt problem. However it can (like the UK, japan etc) translate a debt liqudity/rollover issue into currency/inflation risk for bondholders rather than principal risk. Once the ECB joins that game then we have a level playing field.
currently bond investors assume that there will always be some hard money haven that doesn’t translate principal risk to exchange rate risk.
the destruction of this conceit is crucial to establishing a stable financial framework. its all about default and the language of default. what’s needed is a common framework for default, employed everywhere. that is something the markets will be able to get their heads around.
Jeronimo,
I’m sorry for teasing. This probably is the natural place to end this conversation, you’re right. I don’t agree that you can just dismiss inflation, though, especially as once direct market intervention has been used once, there is precedent to use it again.
We’ll see what happens. I would prefer EU/IMF intervention to the ECB – but let’s wait and see.
I don’t expect we will have long to wait.
@ Edward,
Reading your quotation of Angel Gurria, it looks like she fears a meltdown of the current capitalistic-financial system. I wonder; is it really coincidence that you have placed this article here on the first of may?
Ron.
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The details for Greece programm show that it is very similar to Latvia scenario. Is it a real perspective for Greece to have 1,6 million unemployed?
Joe,
I believe Greece has a solvency problem, while you believe in a liquidity problem. With this difference, it is logical that you conclude that a few months or years will make a difference, and that I don’t.
‘1 – The markets are refusing to buy Greek bonds because investors believe that Greece might default. The bail-out removes that threat for the next three years, so if the bail-out had been earlier then the market would not have shut-down for so long.’
I don’t see why the shut-down period should be proportional to the bail-out waiting time.
‘Also, Greece is now being charged higher interest on new debt because spreads have been allowed to widen thanks to the uncertainty.’
Not exactly. The logical sequence in any financial crisis (cf Bear Stern, Lehman, sovereign default, etc) is:
– Expansion of debt to unreasonable levels, with markets happily merrying-go-around (or should it be merry-go-arounding? I need a native English speaker for that one).
– Sudden coalescence of a bad feeling, with bond level rates increasing rapidly over a short period of time.
– Default, bankruptcy, or public intervention.
The main cause of the spread is the Greek financial situation. A bailout is, by definition, a Government authority breaking the logical flow of events by saying ‘No you won’t go bankrupt’ and paying to that purpose. At the risk of raising eyebrows, I would propose that the possibility of the bailout has actually kept Greek spreads lower that they would otherwise have been (at least until a few days ago). Without the bailout talk of the last months, bond market probably would have pushed Greece (much) sooner, stronger and harder.
Over the last 10 years the level of the interest rates paid by Greece, Italy or Portugal on their public debt were more the result of their Euro membership than the result of an analysis of their real financial situation.
‘2 – I think it’s a question of timing. The Greek crisis comes at a time when the Eurozone is just emerging from recession. In three years time, if Europe can build on its current growth, then the impact from a Greek default would be less severe. The bail-out is buying us time, but that is exactly what we need.’
I don’t agree with this judgement (too much uncertainties) but I think it is a legitimate one nevertheless. However putting problems forward by hoping things will be better by then can be dangerous.
‘If it cannot raise the money by May 19th, it will be forced to restructure.’
Quite.
Dannyboy –
‘The euro will sink and then sink some more, like sterling the past year and a half.’
If that happens – and it may well happen – then it would be the best thing that has happened to the Euroland for a very long time.
‘At this point, these investors have nowhere left to go (which is the sole source of their power) and a long term ‘deal’ of a somewhat radical nature that works for the US, EU, japan and UK can be hatched without reference to what bond investors think.’
A collective default? That would be fun 🙂 and let the bond holders eat cake!
I am not sure of what China would think. Maybe the West (incl. Japan) will tell them ‘We default on our bonds but in return we won’t raise a finger if you decide to take Taïwan’.
More seriously, all Western countries are becoming debt slaves. At some point your prediction could become mainstream in public opinion and when it does it will be a self-fulfilling prophecy.
And then we can start again.
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Greek bond auctions have all been massively over-subscribed this year, no reluctance by investors at all. Quite the reverse.
Lots of misreporting and lies though. Why? Well because the real problems are elsewhere:
http://fxtalks.blogspot.com/2010/05/barbarians-at-gate.html#links
Ivana,
This is from the Danske bank flash comment report from April 27th:
“Greek 2-year government bond yield spreads to Greek 10-year government bond yields have “onlyâ€
increased 30bp today. The market is very thin with few buyers.”
I don’t believe that the biggest bank in Denmark is misreporting or lying. Coverage of the crisis has not been perfect and there has been plenty of confusion, I’ll grant you that.
Your faith in banks, big or otherwise, is touching. Where have you been the past ten years.
It is a matter of record that all Greek Government bond auctions have been over-subscribed by a massive margin this year. There was never any question of Greece not being able to access funds, roll over it debts or default. The problem, such as it was, was that Greece has to accept higher yields, higher than Germany’s but not as high as the yields paid prior to Greece’s entry into the Euro.
This is a simple matter of record.
Ivana,
Here’s the Financial Times Global Market Overview from March 31st:
“Greek government bonds continued to find few buyers after Athens said it would issue a global dollar-denominated note in late April. ”
Perhaps you don’t trust the Financial Times, either?
I actually think you might be the one misrepresenting things here.
From The Guardian on March 4th 2010:
“The Greek government has won its first crash test a day after unveiling radical fiscal reforms as it returned to the debt markets with the successful sale of long-awaited 10-year bonds. Oversubscribed within hours, the bonds issue was seen as a major test of investor confidence in Greece, as it battles a debt crisis that has sent unprecedented waves across the eurozone.”
(source here)
However, later in the same article:
“It was the beleaguered nation’s second foray into the bond market this year. In January, following the sale of five-year benchmark bonds the government raised €8bn, also seen as a key test in its ability to avoid the risk of defaulting on its sovereign debt.”
And, yet, you said:
“Greek bond auctions have all been massively over-subscribed this year, no reluctance by investors at all. Quite the reverse.”
But it would have been more accurate to say:
“The Greek auction in early March was oversubscribed. The Greek auction in January was also very successful. However, when the Greek government tried to sell bonds in April it found few buyers.”
That’s because both of the earlier auctions took place when investors thought there was no chance of a Greek default. When Greece tried to sell bonds in April, it found few buyers because investors thought the chance of a default much more likely.
You misunderstand the difference between primary and secondary bond markets. The Government sells in primary markets. These auctions were massively oversubscribed. Subsequently these bonds are traded on the secondary market where prices can vary. During the crisis volume has been thin and the change in price is not necessarily representative of investor sentiment.
Greek government bond Auctions have all been over-subscribed in 2010 [http://euobserver.com/9/29338]. According to the Financial Times on January 25, 2010 “Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) government had reckoned on.” In March, again according to the [[Financial Times]], “Athens sold €5bn (£4.5bn) in 10-year bonds and received orders for three times that amount.http://www.ft.com/cms/s/0/245030a8-2773-11df-b0f1-00144feabdc0.html” Similarly in April 2010 the sale of more than 1.5 billion euros ($2 billion) in Treasury bills met with “stronger-than-expected” demand.
If you do not actually have the facts then really you should refrain from comment.
According to the Financial Times on January 25, 2010 “Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) government had reckoned on.â€
Bond market results for Greece this year, for reference:
In March, again according to the Financial Times, “Athens sold €5bn (£4.5bn) in 10-year bonds and received orders for three times that amount.
http://www.ft.com/cms/s/0/245030a8-2773-11df-b0f1-00144feabdc0.htmlâ€
Similarly in April 2010 the sale of more than 1.5 billion euros ($2 billion) in Treasury bills met with “stronger-than-expected†demand.
Bond market results for Greece this year, for reference:
According to the Financial Times on January 25, 2010 “Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) government had reckoned on.â€
In March, again according to the Financial Times, “Athens sold €5bn (£4.5bn) in 10-year bonds and received orders for three times that amount.
http://www.ft.com/cms/s/0/245030a8-2773-11df-b0f1-00144feabdc0.htmlâ€
Similarly in April 2010 the sale of more than 1.5 billion euros ($2 billion) in Treasury bills met with “stronger-than-expected†demand.
http://www.ft.com/cms/s/0/b451e770-09a8-11df-b91f-00144feabdc0.html?catid=2&SID=google
You can look up the April results yourself.
The facts, rather than comment or opinion, really need to be widely understood.
Ivana,
It might surprise you, but I do actually know the difference between primary and secondary bond markets.
Most of the Wikipedia article you just copied and pasted is irrelevant. First of all, the January and early March auctions it cites occured before markets thought there was a serious risk of default.
Yes, you’re right that there was an auction in April which did very well after the EU/IMF bail-out was announced (source here).
However, other primary bond market auctions have also failed spectacularly (source here). The March 30th auction had a target of 1 billion euros, and it raised only 390 million. That auction took place in the primary bond market and it was not oversubcribed.
Look, I don’t mean to fight with you. You’re not wrong: the few bond auctions the Greek government has held this year have been oversubcribed. However, my point is that most of them were held before a Greek default seemed likely, and yet they gave very good interest rates that were attractive to investors.
I could be wrong, but the Greek government also seems to time its auctions to capitalise on news that will reassure the markets (EU/IMF bail-outs, etc).
Ivana,
We probably agree on a lot, actually. However – there is one area we fundamentally disagree on:
“There was never any question of Greece not being able to access funds, roll over it debts or default. The problem, such as it was, was that Greece has to accept higher yields, higher than Germany’s but not as high as the yields paid prior to Greece’s entry into the Euro.”
I find Jeronimo’s argument that ECB direct intervention in the markets would prevent a default more convincing (although even the ECB could not prevent a default if all the PIIGS went at once). The problem with ECB intervention is that it starts a precident and that could encourage member-states to misbehave.
However, Greek government bond auctions can fail.
Any Government’s auctions can fail. All you need is to convince investors not to bid. Pick a government any government, in those circumstances auctions will fail. Over the past two years government bond auctions have failed in Germany and the U.K., you can look that fact up for yourself. And U.S. auctions have seen some odd results, despite the FED hoovering up paper. So ‘failure’, as it were, has been seen in a lot of places but not in Greece thus far.
Except that Greek bond auctions have either failed or come close to failure – (see here and here, for example).
I agree with you – Greece will not default (for the next three years). However, I disagree with you (and Jeronimo) that a Greek default was not possible. Even with ECB intervention, if widening spreads had put too much pressure on other PIIGS then we would have been in very dangerous territory.
The EU has bought itself some time. We now have three years to sort ourselves out, or we’ll be in the same situation again.
In your link it mentions a technical failure, I’m not sure which prior auction technically failed, if you could provide details that would be good. I can only get one of the links to work for some reason.
Any government can default if there are no bidders at successive auctions. Germany had two auctions fail successively last year. That did not mean that Germany was close to default, it meant yields had to rise. The panic which was created over the Greek situation was dangerous now we see how the rest of this plays out. Taking the raings agencies out of the game would be a very good first move.
correction: ratings agencies
I didn’t copy from Wikipedia, I made the Wikipedia entry. Which auctions failed? I am only asking because I really would like to have the details. When did auctions in 2010 fail in Greece. Any details at all you can provide would be welcome this end. Information is very important to me.
Do we have a time lapse problem with these posts and e-mail notification. There seems to be a chronology problem.