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Why Is The Bond Market Ignoring All The Rosy Greek Rhetoric? And Has That Been The Plan All Along?
The Wall Street Journal's Heard On The Street points out the apparent contradiction between all the, so far, empty rhetoric involving Greece, and the bond market's relentless ignoring of all things favorable. Images of Lehman's stock trajectory in July and August come to mind.
The latest jump in Greek government bond yields raises a worrying
possibility: the government bond market is starting to malfunction. The moves in Greek yields are occurring on relatively low volumes, with
individual trades around one-third the usual size, traders say. The
selling pressure seems to be being driven more by some institutions'
inability to hold volatile assets than new concerns about Greece's
budget problems. But the volatility also is preventing buyers from
snapping up the paper, even though many agree Greek yields are
attractive and officials across the euro-zone dismiss talk of a Greek
default as irrational. Meanwhile, market psychology now seems to
interpret all news about Greece as negative.
The implication is that coupled with the newly emerging austerity measures in Portugal, Europe, but mostly Germany, will run out of options very quickly. On one hand Trichet and Merkel have stuck themselves in a corner with all the recent anti-moral hazard talk (and the question of whether Europe's strapped public sources can accumulate enough bailout capital in time is still open), and on the other, as Lehman so well demonstrated, a colossal event such as a eurozone member defaulting, would likely have the exact same unpredictable domino consequences that everyone has long been warning about. The silver lining - an imminent drop in the euro, and a boost to European exports. Perhaps this is the agenda all along - Greece will be the sacrificial lamb which will satisfy the bloodthirst of French and German unions, and prevent political landslides in all of Western Europe. And the kicker - they can't tell Bernanke and the U.S. they did not go along with the G-20 plan of keeping the euro artificially high: after all this will be spun as an "exogenous" event.
And the good thing is, everyone still has a very fresh memory of what happens when the liquidity premium is added to the equation.
There are echoes here of previous disruptions in credit markets,
including the breakdown in the covered bond market in the fall of 2007.
Then, spreads on high-quality bonds that were highly unlikely to
default widened sharply even on small sales, as risk-averse banks found
themselves unable or unwilling to take the risk of market volatility.
That this now appears to be occurring in the government bond markets
suggests the financial system is still extremely fragile— a concern
when central bankers are talking about the need to start removing the
extraordinary liquidity support they have provided.
Yes, the implications of a default are bad, but unlike the U.S., Europe seems willing to take the pain and rebuild later, the diametrical opposite of what America has done. And with a euro crash, the key variable toward rebuilding the European economy will be in place.
The bigger problem is that even if Greece does take the fall, how far behind can other countries be?
The lesson from the financial crisis is that when liquidity evaporates
from a market, stronger sovereigns need to step up and backstop the
system. Greece's woes may not and, arguably, should not reach that
point. But if the volatility continues, other states facing budget
questions, like Portugal and Spain, could find themselves in the firing
line.
Ironically, the bitter medicine for the rescue of both Spain, Portugal and the other PIIGS may just the transformation of PIIGS to PIIS.
Either way, the next two weeks will be critical in deciding Greece's future.
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Germany, France Deny Report of Aid to Greece From EU
Last Updated: January 28, 2010 10:15 EST
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aWTLP2yl5JI0
and a 30 minute Soros interview on Bloom. from earlier today with Margaret Brennan from Davos
http://bit.ly/czJrCL
OT but this is a great post from Bi on the GS / Dem $change$ connection
http://www.businessinsider.com/the-democratic-partys-favorite-wall-stree...
Shorting the Euro in greenback terms does sound like a plausible Soros trade.
I've been living here in Europe for years now and have seen the "evolution" of the EU first hand, and I can tell you that for all the double speak (and they are great at double speak - the European politicians that is), there will be NO Greek default. Either the Greeks manage to get their house in order on their own, or they WILL be backed and "helped" by the EU. The no bailout talk is directed at the Greeks themselves in an effort to get them to be good little children, but in the end, they will not be abandoned any more than California or Florida would be in the States.
Portugal, Spain, Italy and Greece is where the sun shines in Europe, and where all those Germans plan to retire. ;-)
as Lehman so well demonstrated,
i thought Dick Fuld said it was those darn short sellers?
I'm not following. Wouldn't a default by Greece strengthen the Euro and a bailout weaken it? A bailout, I assume, would consitute monitization of said debt...
The fear trade, to the U.S. dollar's benefit. You may be right in the longer term.
I agree. Sounds like Germany is saying NO to inflation. Why is the USD rising? Because of Greece? Gimeafukinbrake. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/709581...
Chappelle: "I wanna PIIS on you....."
R.Kelly Remix: "I believe PIIGS can fly..."
h/t
These guys are al insolvent...
it's reaarnging deck chairs on the Titanic...
watching a slow-motion train wreck
watch Judd Gregg interact with Missy Francis (CNBComcast/MSNBS)and challenge her integrity
http://www.politico.com/news/stories/0110/32177.html
And we all know Judd Gregg is internationally famous for his integrity.
Let's all collectively pray that Gregg chokes on a corporate dick next week.
//The lesson from the financial crisis is that when liquidity evaporates from a market, stronger sovereigns need to step up and backstop the system.//
No, that's incorrect. The eventual lesson that's going to be learned from this once all the singing and dancing is done is that the stronger sovereigns CAN NOT AFFORD TO step up and backstop a crazily overleveraged system. This has nothing to do with will or wishlists. It's just pure mathematics.
I'm not sure how much "stronger" the stronger sovereigns are, in reality. Both Germany and France large amount of public debt, huge social programs and an aging populace themselves.
Aging population for Germany only. France has the 1st or 2nd birth rate in Europe, slightly above 2%.
France and Germany are the largest economies of the Eurozone. They definitely offer better security than most of the Eurozone members.
That would be muslims popping babies - i.e. future social cases bleeding the economy white.
I wonder where german pension funds are invested .. Greek shipping? Spanish holiday apartments? Irish land banks? ..
Greece, and the majority of Greek citizens, have been living a great life for the last 30 years. The problem is that they have done so using EU funds that were supposed to be used for education and agricultural reforms and infrastructure related projects projects.
Money was diverted to hire public servants that often retired at the old age of 38 or 47 ( I know first hand since I have family members that have retired at 45)
The bill has come due, time to pay. No mercy for a corrupt political system and the hundreds of thousands of illiterate public workers.
Greece has been losing their best and brightest to USA, England and Germany. What doctor in his right mind will accept 1400 Euro a month salary? A salary that is lower than what public servant with a sixth grade education is earning?
Greece is a very sad place. Greeks have a very over inflated ego and sense of themselves as better than others. They are living in the long long long ago past. They will now all suffer for this and the sooner they get kicked out of the Euro the better. Their inclusion into the Eurozone was a massive mistake and gave a banana republic of a country a legitimacy it does not warrant whatsoever.
As Sarkozy recently made clear during his speech at the WEC in Davos the instability in exchange rates and sovereign debt defaults are perfect opportunities for the globalists to push forward their global governance agenda as set forth in the pronouncements of the G20.
To the globalists the crises occuring within the PIIGS are welcomed developments.
I think you are aware that globalization is not new right?
That a country like the US is a product of globalization?
alll eyes on greece .. 3% of euro GDP.. run to fiat dollar .. with california other states failing .. 35% of usa GDP.. a fool and their money are soon parted . the big brain wash..
Precisely. This is something that I have been repeating right here on ZH for a long time now.
bond yields of the rest of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) have been rising steadily over the past month since a default of Greece will imply that they do not have an implicit guarantee on behalf of Germany, just like the collapse of Lehman Brothers took down the bonds of major banks around the world in September of 08.
http://israelfinancialexpert.blogspot.com/2010/01/when-will-euro-collapse.html
If you look at European history before the Euro (constant devaluations made by everyone in every currency) I think that this is exactly what the ECB want.
Europe needs to be more competitive vs. Asia (forget the US) and this is the new game in town.
China have been exporting deflation with their cheap goods for the last 10 years but now could export not only inflation around the world but also take huge investments in countries such as Japan (if they were to fail).
Geopolic has changed and further confirmed that the US lost their supremacy and Europeans are stuck in the middle of nothing.
Spender PIIGS
Spender PIIGS
Does whatever a Spender PIIGS does
Can they pay
back their bonds ?
No they can't
They are PIIGS
LOOK OOOUUUTTT!!
Here are the Spender PIIGS!!
Astonished but unsurprised by the analysis done on the outcome of Greece's situation.
Methodically, three outcomes:
-Greece is expelled from the EU
-Status quo
-Greece is integrated further in the EU
It can be understood why some people developp a bias for the first option. This happens mainly in UK or related as the big blue monster lying just at their doors is a source of troubles for any singled out nation and the dream of seeing the monster falling apart often prevails on more ground based analysis.
Yet one reminder: the EU building process is one of nations yielding their sovereignty to a supra national entity.
It is far from being achieved, meaning that Greece has still sovereignty to surrender.
This said, and Greece being weakened, it is a perfect opportunity for the EU to move to another step in the integration, taking advantage of Greece's situation to bring the integration to a new stage.
This is the option I retain as I cant imagine the EU wasting an opportunity to accomplish what they seek at a cheaper price. Maybe time for a well thought trade off: Greece losing sovereignty against a continued partnership within the EU.
In the sense of allowing the ECB or some other European body substantial (total?) control over fiscal policy in return for a bail-out?
I could see that.
As a Brit who is not necessarily opposed in principle to the idea of a European super-state, but who detests the prospect of anything resembling the sort of European super-state we might actually get, that is deeply worrying.
Since the Lisbon Treaty came into law, countries cannot just be expelled from the EU; the other member states must vote on their expulsion. Plus there is the question with regard to the Euro; expulsion does not necessarily mean they fall out of EMU. So, do they retain it, or go back to the drachma?
I think option c) is more likely, with the ECB taking direct control of the financial structure.
Spender PIIGS
Spender PIIGS
Does whatever a Spender PIIGS does
Can they pay
back their bonds ?
No they can't
They are PIIGS
LOOK OOOUUUTTT!!
Here are the Spender PIIGS!!
Title should have been the catchy and appropriate one-liner "PIIGS to PIIS".