Wednesday, June 15, 2011

Putting Greece into perspective


The big talk today is about Greece, and how default looms and social tensions are escalating. As the chart above shows, yields on 2-yr Greek government debt have soared to 28%, a sure sign that investors fully expect a significant restructuring (a polite word for default) of Greek debt within the foreseeable future.


Yet as this next chart shows, 2-yr Eurozone swap spreads have hardly budged, even as Greek default risk has soared. What this says is that while the market is convinced that Greece will default, the market is only moderately concerned that the risk that a Greek default will prove contagious or otherwise threaten the European banking system.


And despite lots of talk about how a Greek default might force Greece to leave the euro, and how this might be the start of the unravelling of the euro, the euro remains at the upper end of its valuation range against the U.S. dollar.

In short, the market is telling us that a significant Greek default is likely, but that it will have only a limited impact on the rest of Europe, and by extension, the world. Markets have had plenty of time to prepare for this event, so it is not likely to be very disruptive.

10 comments:

Stefano Bassi said...

You ignore the domino effect on Portugal, Ireland...Spain...Italy
GIPSY WAY
and the domino Effect on USA Banking System (BofA, Citigroup in primis)
The market in this case go step by step, with possible big acceleration...

Frozen in the North said...

Makes perfect sense as the two economies at risk Portugal and Greece account for less than 5% of Europe GDP. Bring Spain (9%), Italy (11%) and things get interesting. But right now the reality is that Greece is a side show for Europe CDS market. Of course there's always the risk that Ireland, Portugal decided that the way of Greek default is the right course of action.

However, leaving the Euro or restructuring involves a great deal of pain.

Overall, the market is concerned, oil off by 5% on the day, stock market (S&P500) only 9 pts off its march low.

Frankly, I would like a more positive spin from CBP

Stefano Bassi said...

the small dimension of the greek economy is not important
The trigger of suprime was much little...but you can see the consequences: the Bigger Crisis from 1929...
Is important the dimension of Debt
the derivatives on the debt
the weight on the balanche sheet of banks and BCE
and so on...
the Greece is small but can become a thriller-trigger...

McKibbinUSA said...

A Greek default will encourage more defaults all along Europe's southern flank...

Stefano Bassi said...

Of course the problem in Greece isn't the size of its economy, but rather the size of the debt and the matter of who is exposed to it.
It is very Simple to understand....more simple than the subprime-trigger...;-)

Steve Fulton said...

What would it cost to buy Greece and make it the 51st state?? Can't cost all that much??

Stefano Bassi said...

no cost for you
because all the US is on based on DEBT DEBT DEBT
(same thig for the Europe etc etc)
the cost is not for you
but for your son
and so What's the problem? ;-)
Carpe Diem...

McKibbinUSA said...

Greek 2-year bond yields are at 28.2%:

http://wjmc.blogspot.com/2011/06/greek-2-year-yields-at-282.html

Anyone still believe that austerity is working in Greece...?

Stefano Bassi said...

the true problem is not the austerity
but if you live on debt debt debt
over your real possibility...
like Greece
like US
like all of us...

When I read the US Blogs
I'm Very worried
because I see that You CAN'T UNDERSTAND
You Can't...
And before or after
all of us will pay the bill...

egp said...

Scott, you are right - if you believe in the Efficient Market Hypothesis. Do you? IMHO As we learned recently again the market is about future expectations but not about the future itself.

The Euro/Dollar graph reminds me more of two giants falling in sync than of two stars ascending in sync.