Greece Raises the White Flag
Earlier this week Edward mused about whether we were about to see movements in the Greek trenches as yields on 10 year bonds rose to a record 7.76 per cent at one point and closed up 26 basis points on the day. Today, as yields on 2 year bonds flirted with the 10% marker Greece opted to call in the outstanding favor from the IMF and the EU at about as 45 billion euros ($60 billion) put up as a financial lifeline (and in an attempt to calm markets) a little over a week ago.
Greece called for activation of a financial lifeline of as much as 45 billion euros ($60 billion) this year in an unprecedented test of the euro’s stability and European political cohesion. The appeal for help from the European Union and International Monetary Fund follows a surge in borrowing costs to what Greek Prime Minister George Papandreou called unsustainable levels that undermine efforts to cut a budget deficit of more than four times the EU limit. Greek bonds and stocks rallied after the announcement.
“There was no response from the markets, either because they didn’t believe in the political will of the EU or because they decided to go on with speculation,” Papandreou said today. “The situation threatens to demolish not only the sacrifices of the people but also the regular course of the economy. All the efforts by the Greek people are in danger of being in vain.”
With national debt of almost 300 billion euros and investors demanding almost triple what they charge Germany for its 10-year bonds, Greece faces a fiscal mess that threatened to spread to Spain and Portugal, forcing the EU to set up a standby aid facility. At stake is the future of the euro 11 years after its creators gave the European Central Bank responsibility for interest rates while leaving budget policy in national capitals.
Obviously, this is more like to be the end of the beginning than the beginning and as Greece readies itself to receive the loan (which will be tallied at 5%) other countries are sitting in the holding room waiting for the doctor to call them. Spain and Portugal come immediately to mind here and it remains to be seen whether Germany or indeed the EU or the IMF have the will and capacity to take another tête-a-tête with the market as Portuguese and Spanish spreads begin to widen. Of course, we are not there yet and it is still highly doubtful that the current plan will help Greece to avoid a default.
Activating the aid and turning over economic policy to EU and IMF oversight was “a new Odyssey for Greece,” Papandreou said. “But we know the road to Ithaca and have charted the waters,” referring to the return of mythological hero Ulysses to his island home.
We should consequently remember the debt snowball here and my guess is that 5% is still way too high a levy to pay for Greece with the nature of nominal GDP growth the country can expect in the coming years as deflation is imposed on the economy. We will see soon enough, but my feeling is that part of the whole policy rigamole that will now unfold, Greece will have to "restructure" notable chunks of her debt.
Finally and on a brighter note, markets do not seem to be able to decide whether this is good or bad for the Euro. Consequently, Bloomberg's ever flashing newsstream today pitted CMC Markets' chief market strategist Ashraf Laidi predicting the Euro to move down to 1.27 to the USD against Commerzbank analyst Ulrich Leuchtmann who predicted the Euro to gain on the "successful" bailout.,
Well, well ... place your bets according gentlemen. Unlike in Greek's case he who ultimately raises the white flag should be able to live another day.