Greek website bankingnews.gr reports that today's breach of 400 bps in spread to bunds on the 10 Year GGB is a very critical level, and that if spread widening continues, Greece "risks completely losing control" of its funding situation. The critical level in the 10 Year GGB spread to bunds beyond which all hell will break loose is 450 bps at which point "everyone will unload bonds and then control will be completely lost." (pardon our translation) Odd - no mention of CDS speculators having blown up Greece today: instead it is bond selling... How novel. The site also notes that while today's actions "should be a reasonable response and should reduce the spread, if that does not happen then Greece will completely lose control and very soon." This is likely the worst mistake that Greece could have done. By giving bond holders a bogey the target spread will become a self-fulfilling prophecy and will likely be breached in a matter of days. In addition, bankingnews.gr reports that 450 is a "milestone in the bond market as it represents a level beyond which the state will not be able to borrow."
A roughly-translated version of the article indicates the following key concerns for Greece:
1) In addition to new shorts, today saw the selling by many long-term investors. The shorts are testing the resolve of the EU and IMF to bail out Greece when funding costs become unacceptable.
2) According to well-informed sources, investors have indicated that a spread of 450 bps or higher will kill any interest in holding any more 10 Years leading to a sell off.
Yet what will a disclosure by Greece be without at least a little scapegoating. Sure enough: "While the spread widening was excessive, there is no plan or mechanism to prevent further widening. The hedge funds and U.S. investment banks have won the battle yesterday by forcing long-term investors to sell." Farewell Germany, old friend, hello America, new favorite scapegoater.
Greece is said to have 3-4 weeks in which it does not need to borrow new debt. Also, today's actions has allegedly not precluded Greece from seeking idiot investors out of the US for US denominated bonds. After today's market action we are convinced some mutual fund will be dumb enough to lend to Greece regardless what terms are put on the table or just how bad the Greek funding situation is. In the meantime, we believe Greece needs to roll several short-term bills. With all near-term debt exploding by several hundred points today, the next stress point may not be the 5-7-10 year part of the curve at all, but the ultra-short term side. And when overnight funding is in jeopardy, together with deposit outflows into stable countries, well, that is the end: even US dumb money may have to finally recognize that sooner or later.