The yield on 10-year Greek government bonds briefly hit 14% yesterday, April 26, before finishing at just 13.52%. That was an increase of 3.4 percentage points on the day. (Just for reference the total yield on 10-year U.S. Treasuries is 3.75%.)
So much for the European Union/IMF (International Monetary Fund) rescue plan. Investors see squabbling politicians and doubt that the plan will save Greece from default. (For more on how the European Union has let politics defer a solution see my post https://jubakpicks.com/2010/04/26/politicians-in-germany-do-their-best-to-make-the-greek-crisis-worse-and-it-looks-like-theyre-succeeding/ )
The rout in Greek bonds has spilled over into the market for the sovereign debt of other deficit-heavy countries. The yield on the 10-year Portuguese government bond rose above 5% yesterday, for example.
The best guide to how the market is setting the odds of the crisis expanding to other members of the European Union is the credit default swap market. (Credit default swaps are a kind of insurance against default. The buyer of this derivative is paying a premium to be made whole in case a company or country fails to make good on its debt. Each basis point—100 basis points make up one percentage point—in the price of a credit default swap protecting $10 million of debt against default for five years corresponds to cost of $1,000)
Here are today’s prices for credit default swaps on Greek government debt—and the debt of Portugal and Spain, the two countries at the top of the list for the next potential crisis: Greek government bonds 764 basis points (up 54 basis points today), Portugal 349 basis points (up 54 basis points on the day), and Spain 204 basis points (up 16 basis points.)
Well … I bought 20,000 of NBG stock yesterday at $2.62. 15% return in one day. Not bad! That is why I like it when people panic around me.
Jim,
I think this still ends much like the Dubai/Abu Dhabi crisis. Too much damage caused by not bailing them out….. Long term Euro (who 2 years ago everyone said was going to replace dollar) will break out. It’s also interesting to look at all of the countries who started putting reserves in Euro’s at 1.65. Huge bang to their balance sheets
XY
I don’t short the markets. I was just making a parody on the purchase of Greek bonds in a previous comment.
actually got some NBG today…..feels like putting 1000 shares on black on the roulette table
Make sure your parachute opens.
Happy shorting.
I am jumping off the Empire State Building. I expect Monsieur Trichet & Co./colleagues to throw me a parachute when I reach the 10th floor so I can land safely. I will only be carrying a calculator to add up my profits on the way down. Any comments?
bsdgv,
If you’re a German politician, which of the following seems like a more prudent course of action?
1. Bail out Greece, which is politically unpopular?
2. Bail out German banks which invested in worthless Greek bonds?
Given the choice, I’m sure most German politicians would pick the 2nd answer. Whether you or I think it’s the right thing to do or not is irrelevant to most Germans.
Ed,
Greece (and PIIGS) are Europe’s backyard. Would you give your backyard away just because your grill caught fire? Let’s not mix German domestic political rethoric with reality. It is the German banks (starting with Deutchebank) that will hurt the most if something happens to Greece. I bet they are doing their best to get German government help stabilize Greece.
As Jim implied yesterday, it is bad for Greece that the excrement hit the fan in a big German election year. Having said that, I am totally disappointed at EU. I knew Greece was a shitty 3rd World country when it was admitted to EC (precursor to EU) in the 70s. I was hoping that EC would turn Greece into a modern European country over time. Obviously, I was wrong. The European and Greek corporations/politicians took advantage of Greece’s backwardness. They gave Greece sugar water in the name of economic advancement. I am sure the rich Germans and Greeks thrived during the boom years and now it is the poor Greeks that will do the suffering.
I am buying NBGPRA which is the preferred of NBG National Bank Of Greece. It pays over 12%. Any comments?
ruters78
CDSwaps obviously backstopped by the taxpayers if the counterparties cannot pay! Gotta love it. But don’t tax the profits as ordinary income if the bets pay off because wall street types so need the money now that their leveraging abilities are curtailed.
Actually, nmac and Run26.2 bring up an intriguing possibility I hadn’t considered: What if the EU does…nothing?
Picture this: Greece keeps piling on the debt at exorbitant rates, and doesn’t cut their spending enough to make any difference?
As the EU dithers and does nothing, eventually the bond markets freeze Greek bonds, meaning they can’t spend any more. Greece defaults on it’s debt, undoubtedly hurting many European banks in the process.
Let’s say the EU member nations decide to bail out their own banks, but NOT Greece. Greece’s government collapses under it’s debt. Greek banks all fail. Greece basically enters a severe economic depression.
The euro, with no action by the EU member states to save Greece, could actually bounce back as Greece burns down, without any mention of expelling Greece or Greece leaving the EU.
Of course, this doesn’t take into account the other PIIGS. However, the EU could conceivably take the same approach with all of them, and get similar results. Eventually, the euro bounces back as the weaker members of the EU collapse into economic turmoil.
Any thoughts on this scenario?
P.S. Run26.2, your idea about the EU “lower tier” was funny!
Run,
I love it. Then investment houses could issue two types of CDS, one for default and another for relegation!
I seriously doubt that Greece will get the boot from the EU, there are too many interconnections, plus they are just to PC to admit the failure. Not to mention all the EU money that has already been sunk into infrastructure, etc. in Greece and other less robust economies.
Maybe the EU will create a second division, like European Soccer/Football leagues and they can relegate Greece, Potugal, etc. to the lower tier and then move up when they have the mojo to play with the Premier League.
I doubt very much that Greece will leave the Euro, there is no mechanism to expel them and if they chose to leave and engage in competitive devaluations they will only increase the cost of servicing their very substantial amount of debt outstanding.
My only comfort is that Jim has resisted the temptation of mentioning Ireland in the same article!
I just love it. Bought some shares today.
sliman: NBG is somewhat different. It has most of its business outside Greece, in countries, which are doing fairly well.
This morning Reuter reported a German official saying Greek’s temporary exit of EU an option. This is the first time that I heard of EU official saying such thing. I have been saying all along, get the Greece out of EU!
This may be a stupid question, but I would assume that there are firms that will be on the hook if Greek defaults and the “insurance” must be paid. Do we know who has the most exposure?
sliman,
The difference is that we don’t know how far the Greek government will go (or be forced to go) to balance their books. Any Greek company may be facing some significant tax increases. On the other hand, should Greece leave the EU (or get kicked out), their banking system could end up seriously damaged.
There are many more possibilities, and not many of them are good for Greek companies or banks. I’d avoid ANY investments in Greece, and most investments in EU nations (since they could face collateral damage from the Greek implosion).
Any thoughts about NBG National Bank of Greece. Seems like a similar situation to BAC last year.
Jim;
What are the Credit Default Swap rates for US bonds?