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Happy days for Greece and the euro

posted on December 19, 2012 at 5:30 pm
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The euro climbed to $1.324 today. That’s the highest level against the U.S. dollar since May. The euro also hit a 16-month high against the yen today.

Lots of good news driving the euro today—most of it related to Greece.

Last night Standard & Poor’s delivered a six-notch credit upgrade to Greece. The move to B- (and stable) is the highest rating for Greece from S&P since May 2011. The previous rating was “selective default.”

The European Central Bank announced that it would again accept Greek debt as collateral for commercial banks that want to borrow from the central bank. The European Central Bank said that the move was recognition of the country’s economic reforms and its budget plans.

On the two news items prices for Greek government bonds have rallied sending the yield on Greek government 10-year debt to 12.1% from 12.8%.

I’ve got two thoughts to offer on this:

First, I hope that no one is thinking about going back to private bondholders any time soon to ask them to sell their bonds back to the government at a discount. Those investors—including Greek banks—that took part in the buyback are certainly feeling like chumps this morning.

Second, the reaction by Standard & Poor’s and the European Central Bank both seem excessive. Yes, the delivery of cash to Greece means that the country will be able to meet its bills for most or all of 2013. But we’re still talking about as country with an unsustainable level of debt and an economy stuck in recession as far as the eye can see. Maybe the European Central Bank felt a need to act as a cheerleader for Greece, but it’s hard to see why Standard & Poor’s would think it should play that role. (On the other hand, the rating isn’t terribly relevant since very few Greek bonds are left with private investors. Most are now owned by European governments, the International Monetary Fund, and the European Central Bank. Which, if you think about it, talked up its own position today.)

I don’t think I’d stand in the way of a rallying euro today (or tomorrow or next week.) Financial markets seem determined to see the glass as half full.

But the higher the euro climbs, the more vulnerable it becomes to the inevitable negative story out of Greece. I think you can probably even write the headline for that story: “Sinking economy means Greece won’t meet budget goals in 2013.”

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One comment

  • dxia on 20 December 2012

    I see it as more fun coming and more opportunities in 2013. :-)

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