This is what it looks like when bond markets run the world
This is what it’s like when a country loses control of its own affairs and has to dance to the tune of the bond market.
Today, March 3, Greek Prime Minister George Papandreou announced another $6.6 billion in budget cuts. The new round of reductions is meant, first, to convince skeptical European Union leaders that Greece is serious about reducing a budget deficit that had climbed to 12.7% of GDP (gross domestic product.) Leaders such as Germany’s Angela Merkel, scheduled to meet with Papandreou on March 5, have refused to offer Greece any concrete aid or guarantees without further action.
But the real audience here is the bond market. Greece has to roll over about $25 billion in bonds in April and May. The bond market could force Greece to pay a ruinous interest rate to refinance that debt or, worse yet, simply refuse to bid at all. The latter would bring the country one step closer to default.
But Greece—or more accurately the average Greek citizen—is going to pay a hefty price to convince the bond market to pony up.
The bet is that the Euro is headed even lower
Nobody is taking off their bets against the Euro quite yet.
Short positions against the Euro on the Chicago Mercantile Exchange, which had set a record in January, set a new record in the three weeks that ended on February 9. And judging from the continued pressure on Greek stocks and bonds, the trend is still to short the Euro’s troubles.
During the three week period short contracts on the Euro climbed to 63,000 contracts from 41,000 contracts.
Insure your neighbor’s house and then burn it down–derivatives played a role in creating the Greek crisis
Credit default swaps are not insurance.
The most common way to describe these derivatives is to say that they’re a way to insure bonds and other financial instruments against default. I’ve used that explanation myself over and over again.
But as James Rickards explains in a column in today’s Financial Times, while these derivatives may be a way to insure against the danger of default, they very much aren’t insurance in one crucial way.
And it’s that difference that has helped turn the Greek budget “problem” into the Greek budget “crisis.”
Just a euro bounce on rumors?
Why are European (and global) stock markets and the euro rallying today on vague rumors that there’s a plan to bailout Greece when yesterday similarly vague official statements couldn’t stem the tide?
Could it be because today the markets believe what they discounted yesterday?
Nah.
How ‘bout because figures released today from CME Group show that short positions against the euro climbed to record levels in the week ended February 2.
Traders and hedge funds have bet nearly $8 billion against the euro. That the biggest short position in a single currency ever, according to The Financial Times. With that many traders and that much money short, it’s a good bet that the euro is due for at least a short-term bounce.
And that’s what I think we’re seeing today. Some traders are simply trying to see if they can stampede a few of the traders holding some of the 40,000 contracts against the euro into unwinding some of that huge short position.
How long the bounce lasts depends on whether or not any of today’s vague rumors turn into anything substantial.
How vague are the rumors?
Reassuring talk isn’t ending the euro crisis
Talk is cheap. And not terribly effective, even when it’s coming out of the mouths of Europe’s financial leaders, in ending a financial crisis like the one that continues to engulf Europe this morning (February 8).
The current phase of the crisis started in Greece, when the Greek government finally admitted that its budget figures were a fiction and the budget deficit would be a huge 12.7% of GDP. Traders and investors have sold Greek bonds and stocks ever since.
As of noon today in London the prices of Greek bonds were down again with the yield on the two-year Greek government bond rising to 6.61%. (For comparison, the yield on the two-year German government bond is just below 1% and the yield on the two-year U.S. Treasury note is 0.77 %.)
Greek stocks haven’t fared any better. National Bank of Greece and EFG Eurobank Ergasias, the country’s two biggest banks, were down 4% this morning.
Over the weekend, European financial officials talked tough about the crisis. “The European members of the G-7 will make sure it is managed,” French Finance Minister Christine Lagarde said on Saturday, February 6, after a meeting of Group of 7 financial ministers and central bankers in Canada. The European Central Bank is “confident” that Greece will cut its deficit to the 3% European Union limit by 2012, said European Central Bank President Jean-Claude Trichet.
Even U.S. Treasury Secretary Timothy Geithner weighed in. “I just want to underscore they made it clear to us, they the European authorities, that they will manage this with great care,” he told reporters.
Trouble is that everyone knows that there’s not much backing up the rhetoric.
