Greece: 5-Year CDS vs. 5-Year Note
Alan Greenspan, former Federal Reserve chairman, said a default by Greece is “almost certain” and could help drive the U.S. economy into recession. “The problem you have is that it’s extremely unlikely the political system will work” in a way that solves Greece’s crisis, Greenspan, 85, said in an interview today with Charlie Rose in New York. “The chances of Greece not defaulting are very small.” Greek government bonds slumped, pushing the yield on the two-year note above 30 percent for the first time, as Prime Minister George Papandreou’s failure to win support for more austerity fueled speculation the European country will fail to meet its obligations. More than 20,000 people protested in Athens this week against wage reductions and tax increases, with police using tear gas on crowds and strikes paralyzing ports, banks, hospitals and state-run companies. The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” said Greenspan, who ran the central bank from 1987 to 2006. That may leave some U.S. banks “up against the wall.”
–Wall Street Journal – What if Greeks Decide They Don’t Want to Be Rescued?
The European Union, European Central Bank and the International Monetary Fund are negotiating hard among themselves about how to structure debt relief for the Greek economy. The latest reports suggest they might have come up with a temporary deal among themselves. But what the EU, ECB and IMF want won’t matter unless they get the Greek government to play as well. And that’s by no means assured. For one thing, Greeks are growing fed up with austerity and seem very unwilling to take on the still stricter conditions being demanded of them to win fresh funding and avoid default. The Greek economy has taken a beating during the past couple of years. Non-stop, large-scale political protests, routine general strikes and parliamentary rebellion have brought Athenian streets to a standstill. And Prime Minister George Papandreou’s government is teetering. Greeks are starting to question whether there might not be an easier way out of their crisis. And inevitably, Argentina’s experience a decade ago has been attracting plenty of interest. In the three years leading up to its crisis the Argentine economy struggled, contracting a total of 8.4% by the end of 2001. Strains became so great that the country defaulted on its sovereign debt, causing its economy to slump another 11% in 2002. But the unshackling of its currency from the dollar and subsequent devaluation also reignited growth. Since its 2002 low, Argentine gross domestic product will have expanded by an average annual 7.4% by the end of this year, according to IMF data. Crucially, Argentine output was back above its previous peak within three years of default.
–MSN/Money – Jim Juback: Back to the brink of disaster
The fallout from derivatives — this time tied to Greek debt — could trigger global financial contagion. How could we be dumb enough to let it happen again?
But that’s only part of the possible contagion. Estimates put the total for all sovereign credit-default swaps at somewhere around $2 trillion to $3 trillion. A Greek default could trigger a repricing of the credit-default swaps on Irish, Portuguese, Belgian and Spanish debt that could wreck the portfolios of counterparties. And a Greek default isn’t the only risk. If Greece manages to restructure its debt in a way that doesn’t trigger a default — through a “voluntary” extension of the maturities of Greek debt by some bondholders, say — that, too, might lead to a repricing of credit-default swaps. Such a selective restructuring that doesn’t trigger the insurance policy of credit-default swaps might lead some investors to conclude that the derivatives aren’t worth nearly as much as they thought. Insurance that doesn’t pay off has questionable value, after all. And that, too, could lead to troubles in derivatives portfolios. It’s not like European financial institutions have a lot of cash to throw at a derivatives crisis. The European Central Bank is estimated to be on the hook for $200 billion in Greek debt that it has bought to prop up Greek government bonds. A Greek default would put the European Central Bank, hat in hand, on the doorstep of not-terribly-sympathetic governments in Berlin and other northern European capitals — at the same time as some European banks would also be looking for capital and liquidity. The likelihood is that a Greek default or a credit event short of a default won’t hit a financial institution big enough to turn the current Greek crisis into a European or developed-markets crisis. But no one knows for sure. And when investors can’t figure out where risk might lie or put a reasonable estimate on its dimensions, the financial markets get very, very nervous indeed.
–Reuters – Analysis: Long way to go before Greek messy default priced in
Prospects for a disastrous, disorderly outcome to the Greek debt crisis are beginning to show up on financial markets even though many investors still do not believe it will actually happen. The result is that today’s rising bond yields, stratospheric insurance costs and heavily pressured stock prices may only be a taste of what could come if euro zone leaders fail to halt Greece’s decline and ring-fence it from others. In short, a lot of markets and bond holders have not priced in some of the worst outcomes. With the European Central Bank becoming louder about the prospects for default or restructuring spreading into the banking system, some financial market sectors are in steel-helmet mode. Give or take a basis point or two, for example, the price of insuring Greek sovereign debt against collapse rose on Thursday by about the same amount that it costs in total to insure against default in Indonesia. That’s the increase, not the price, and it implies that Greece is heading rapidly for default with little faith that the euro zone can cobble together anything to help.
–New York Times – As Europeans Wince at Austerity, Markets Fear Turmoil
The instability rocking Greece this week is the latest manifestation of a troubling new phase in the global financial crisis: political turmoil is sweeping through Europe, toppling governments and threatening to undermine efforts to rescue the financial system and, ultimately, the euro zone itself. It seems likely that Prime Minister George Papandreou of Greece will manage to hold his government together long enough to push through the deep cuts required for his debt-ridden country to receive its next installment of international aid. He reshuffled his cabinet on Friday, replacing Finance Minister George Papaconstantinou with veteran Socialist Evangelos Venizelos as part of a broader cabinet reshuffle aimed at restoring waning confidence among Greeks and foreign creditors. But with a rising tide of voter anger against bank bailouts, budget cuts and austerity measures, his popularity is plummeting. And it is not just Mr. Papandreou who is feeling the public’s wrath.
–Businessweek – Merkel Heeds ECB on Greece Saying Bondholder Role Voluntary
Chancellor Angela Merkel retreated from German demands that bondholders be forced to shoulder a “substantial” share of a Greek rescue, saying she’ll work with the European Central Bank to avoid disrupting markets. “We would like to have a participation of private creditors on a voluntary basis,” Merkel told reporters in Berlin today at a joint press conference with French President Nicolas Sarkozy. This “should be worked out jointly with the ECB and there shouldn’t be any dispute with the ECB on this.” The euro strengthened and Greek bonds rallied as Merkel and Sarkozy signaled a reconciliation between German calls for investors to help bail out Greece with warnings from the ECB and France that a compulsory move risked triggering the euro area’s first sovereign default. Attention now shifts to Athens, where Prime Minister George Papandreou overhauled his Cabinet to ensure the passage of austerity measures needed for a bailout. Merkel praised Papandreou’s “commitment” to resolving Greece’s burden and urged the opposition to support his efforts. Merkel said that a debt rollover modeled on the so-called Vienna Initiative was a “good basis” for enrolling investors voluntarily to help Greece. She declined to give a date for the package to be worked out, saying that the matter must be resolved “as quickly as possible.”
–Zero Hedge – “Greece On The Verge Of A Precipice” As A “Lehman-Like” Avalanche Could Be Set In Motion As Soon As Sunday
Greece’s sovereign crisis has reached a critical phase, and the likelihood of a disorderly outcome has risen dramatically in the last 48 hours. Two-year Greek bond yields breached the 30% mark, while Irish and Portuguese yield spreads reached one-year highs. In the meantime, Greek economic and fiscal data continue to disappoint, and public discontent is rising in the face of the human costs of an ever deeper economic downturn. Against this backdrop, the backlash from yet more austerity has triggered a severe blow to the ruling Government. The catch is that the Government needs to approve the Medium Term Fiscal Plan for EU/IMF funding to be disbursed. This is looking challenging as the survival of Papandreou’s government hangs on a formal confidence vote on Sunday, and two more defections from the ruling PASOK party on Thursday depleted its majority even further. Given these unexpected complications, the IMF is now reportedly ready to release its next quarterly instalment to Greece purely on the basis of assurance of EU funding rather than on formal conditionality, paving the way for the €12bn July tranche being disbursed. Olli Rehn stated that the deal on this payment should be forged at this Sunday’s meeting in Luxemburg. However, even assuming that the domestic political hurdle is cleared and the €12bn loan is issued, the divide between German and French positions on private sector burdensharing is unlikely to be resolved immediately, and so the uncertainties about Greece’s longer-term funding seem destined to persist. Indeed, the degree of private sector involvement will have a material impact on Greece’s funding needs. The IMF estimates that Greece’s financing need for the next three years amounts to €144bn in the absence of private sector involvement, but it would fall to €120bn with a “voluntary” rollover, and to around €90bn with an outright maturity extension. Ultimately, we continue to see a Vienna-style initiative as the most palatable compromise.