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Generational Dynamics Web Log for 9-Apr-2010
9-Apr-10 News -- Greece crisis worsens -- again

Web Log - April, 2010

9-Apr-10 News -- Greece crisis worsens -- again

Kyrgyzstan's president goes into hiding, plans counter-coup

Greece's crisis worsens again, as bond yields surge to new highs

As we've been reporting the last few days, two of the signs that Greece is close to default are that, first, wealthy Greeks are moving a great deal of money out of Greek banks to foreign banks and, second, that the yield (interest rate) demanded by investors for Greek bonds is surging.

Bond yields surged again on Thursday -- by a substantial amount. Just yesterday, investors were demanding a 7.1% yield for Greece's 10-year bonds, compared to around 4% for U.S. and German bonds. That was up from 6% from last week.

On Thursday, that rate surged further to 7.58%, according to Financial Times, before falling to 7.35% after Jean-Claude Trichet made some comforting remarks (see below).

On Thursday, there was an even bigger blowout in yields on 2-year bonds, according to the WSJ. The yield on Greek 2-year bonds was 8.034%, compared to 0.917% for the German bonds.

Greek credit default swaps go parabolic

Another measure of investor anxiety is the price of credit default swaps (CDSs) for a particular country's debt. A high price for CDSs indicates that investors believe that a country is more likely to default on its debt.

The following graph from Markit via FT Alphaville shows the CDS prices for the five PIIGS countries:

CDS prices for PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries <font face=Arial size=-2>(Source: ftalphaville.ft.com)</font>

CDS prices for PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries (Source: ftalphaville.ft.com)

As you can see, the prices of Greek CDSs have been surging. The last spike reached 435 on Thursday, meaning that it costs 435,000 euros to insure 10 million euros of Greek debt on Thursday. As we reported yesterday, the figure yesterday was $400,000, up from 344,000 a week ago.

This situation cannot be described as anything but panic. It was beginning to affect the euro currency as well until, as Bloomberg reports. Jean-Claude Trichet, head of the European Central Bank (ECB), attempted to comfort the markets: "A default is not an issue for Greece. I will only repeat that what is important is the measures that are taken and implemented by the Greek government and the Greek parliament."

This may have soothed some people, but in recent weeks it's become clear that investors are going to demand more than words.

No Greek 'contagion'

Many people are also taking comfort from something else. If you look at the above graph, you can see that the CDS prices for the other four PIGGS countries have not spiked the way they have for Greece. This is causing many people of the "in denial" class to say that there's no "contagion" from Greece's problem to the other countries, and so even if Greece defaults, everyone else will be OK.

And I heard a financial pundit on TV on Thursday say much the same thing. "I'm shocked at the suggestion that the Greece crisis would have any effect on Wall Street," he said. "Greece is just a small European economy."

That's why I modified the above graph to add those three labels. As you can see:

The CDS prices for all of the PIIGS countries began growing at the beginning of the global financial crisis in late 2007.

They all surged even high after the Lehman Brothers collapse in September, 2008.

And Greece's CDS prices became parabolic after the Dubai World default in November, 2009.

What this indicates, at least to me, is that there's a chain reaction going on, and that a default by Greece is not only likely, but also would immediately cause other countries' CDS prices to spike in a similar manner.

Additional Links

Violence and looting are widespread in Bishkek, the capital of Kyrgyzstan, after yesterday's coup. However, president Kurmanbek Bakiyev has not acknowledged defeat, and is hiding out, undoubtedly planning a counter-coup. LA Times

Thailand's "Red shirt" protestors are planning for a massive protest on Friday, as the country's generational Awakening era political chaos continues. Reuters

(Comments: For reader comments, questions and discussion, see the 9-Apr-10 News -- Greece crisis worsens -- again thread of the Generational Dynamics forum. Comments may be posted anonymously.) (9-Apr-2010) Permanent Link
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