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Generational Dynamics Web Log for 7-Apr-2010
7-Apr-10 News -- Greece's financial crisis worsens

Web Log - April, 2010

7-Apr-10 News -- Greece's financial crisis worsens

'Maoist' terrorists ambush security forces in India, risking civil war

Greece's financial crisis worsens, as bond prices crash

If you're Greece, then every day in every way, you are feeling worse and worse.

The prices of Greek 10-year bonds have fallen so much, that the yield (interest rate) reached 7.1%. (Recall that, in the case of bonds, as the price falls, the yield rises, and vice-versa.)

Just for comparison purposes, the yield of US 10-year bonds is just below 4%. German bonds have only a slightly higher yield. Thus, the yield on Greek bonds is astronomical by comparison.

In fact, the Greeks are hoping for a 4-4.5% interest rate, according to Financial Times. According to the article, some eurozone countries are willing to lend to Greece at that rate, but the Germans are balking, insisting that the Greeks should pay 6-6.5%.

This is really a mess, isn't it?

Recall that Greece's Prime Minister George Papandreou said that Greece could not survive if it had to pay 6% interest. Last month's phony bailout announcement by the EU, which said that they would bail Greece out, but only when Greece was already on the verge of defaulting, was supposed to reassure investors, so that they'd be willing to receive 4.5% or so for Greek bonds.

Not surprisingly, investors weren't convinced at all.

In fact, credit default swaps (CDSs) on Greek debt also surged upward, raising the cost of insuring €10 million of Greek bonds from €344,000 to €400,000, according to Times Online. This is a significant increase, and indicates the investors increasingly believe that Greece is going to default on its debt obligations.

Credit analysts are very concerned about the sudden and unexpected nature of Tuesday's sell-off, according to the article. Greece has to borrow up to €15 billion of new debt over the next two months, to make payments on its old debt (like using your MasterCard to pay Visa). There's a great deal of concern that the current path is unsustainable.

"Greece will default, but not this year"

I'd like to comment on one of the more bizarre opinion columns I've seen on the Greek crisis. It's by Wolfgang Münchau, an associate editor of the Financial Times, and one of Europe's most widely read financial journalist.

In his column of two days ago, when Greece was still paying only 6%, he began as follows:

"Greece will default, but not this year

I am willing to risk two predictions. The first is that Greece will not default this year. The second is that Greece will default. The Greek government has demonstrated that it can still borrow at a rate of about 6 per cent but if you do the maths on the public debt dynamics, as I did recently, it would be hard to arrive at any other scenario than an eventual default."

He goes on to explain how the Greeks are very clever at debt management, and so he doesn't expect them to default this year, but at 6% interest, Greece is mathematically certain to default in a year or so.

The first thing that's wrong with this is that Münchau cannot possibly have any idea what's going to happen in a year. Thanks to the "butterfly effect," a small change somewhere may have a big consequence for Greece, and the facts could change any day. In fact, they already have -- I'm sure Münchau would have to change his opinion today, now that Greece is paying 7%.

But there's a second thing wrong that's even more compelling. If Münchau knows that Greece is going to default next year, then investors know it too, and no investor would lend Greece money, so Greece will default this year. Why doesn't Münchau know this, if he's one of the most respected economic journalists in Europe?

Carrying this reasoning one step further, Münchau's provocative column was undoubtedly widely read by European investors. And maybe enough investors were turned off to investing in Greece by this column to force yields up to 7.1%.

In other words, maybe Münchau's column was the trigger that caused the sudden sell-off of Greek bonds on Tuesday. That's how the "butterfly effect" works.

Deadly Maoist attack leaves India vulnerable to civil war

Some are calling it "a war," according to the Times of India.

A terror group known as "Maoists" or "Naxalites" ambushed an 82 member team from the Central Reserve Police Force (CRPF), and killed 75. This was their deadliest attack ever, and it has ended all hope of peace talks between the Indian government and the Maoists.

The group was formed in 1967 in a split from the Communist Party of India (CPI). The CPI was aligned with Russian Communists, and they were increasingly moving away from violence and getting involved in India's political system. At that time, Russia and China were close to war with each other, and that split was reflected in the CPI itself. The breakaway group was aligned with China, and became known as Maoists. The initial peasant uprising that led to the Maoists occurred on May 27, 1967, in the town of Naxalbari, giving them the name "Naxalites." (GlobalSecurity.org)

From the point of view of Generational Dynamics, this appears to be a generational split occurring during a generational Awakening era. I can't find any information on the ages of the two groups, but my expectation would be that the CPI represented the "old guard" of survivors of the Partition war, while the Maoists were their kids, born after the war.

The Maoists have partial or complete control of over 200 districts, along the "Red Corridor" occupying much of the western part of India. They pose a serious threat to the stability of India.

Additional Links

Federal and state legislators are cracking down on unpaid internships for young people, claiming that they violate minimum wage laws. NY Times

The Fed released the minutes of its March 16 meeting on Tuesday, and there was absolutely no concern about inflation. As we've been saying for years, America is in a deflationary spiral, and there will NOT be the hyperinflation that so many pundits are predicting. WSJ

Yemen's citizens are becoming angry that their country is being associated with al-Qaeda. Asia Times

If you think an electric toothbrush is high-tech, wait until you hear about the Internet-enabled version. CNN

(Comments: For reader comments, questions and discussion, see the 7-Apr-10 News -- Greece's financial crisis worsens thread of the Generational Dynamics forum. Comments may be posted anonymously.) (7-Apr-2010) Permanent Link
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