27-Apr-10 News -- Greece's bonds are hammered, with yields at 13% - 27-Apr-2010 - Generational Dynamics

Talk of Greek default, and dire consequences for euroland, is becoming more widespread.

Buffetted from both sides, Angela Merkel delivers conflicting messages

On the one hand, German chancellor Angela Merkel is facing elections on May 9, and one poll quoted by Financial Times indicates that some 86% of Germans are opposed to the proposed EU/IMF bailout of Greece.

That's why Merkel is taking a "hard line" on the plan, according to the Irish Times.

On the other hand, Greece will default if it can't make an 11 billion euro payment on May 19, and if Greece defaults, then the world is going to blame Germany. Merkel knows this, and that's why Merkel says that "Germany is ready to help," according to Bloomberg.

The two seemingly contradictory positions are rationalized by imposing all but impossible conditions on Greece as a requirement for aid. Thus, Merkel is demanding that Greece go beyond its partial austerity plan for the next year, and commit to even harsher deficit reductions in the two years that follow.

Ironically, a majority of Greeks also oppose the bailout deal. According to a poll quoted by Reuters, 61% of Greeks are opposed.

It appears that the German people and the Greek people agree on something: That Greece should pull out of the eurozone, and return to using its old national currency, the drachma. That may be the people's choice, but it's not the politicians choice. German, EU and Greek government officials have all been unanimous in saying that having Greece leave euroland is not an option.

I believe that a lot of people are hoping that Angela Merkel will soften her position after the May 9 election, and that the aid can be provided to Greece in time for the May 19 payment.

Greek bonds are hammered, with yields above 13%

For several weeks we've been describing the rising yields (interest rates) demanded by investors who agree to purchase Greek debt, and those yields have jumped to a substantial new high, with 2-year bond yields exceeding 13%, according to FT Alphaville.

The following graph of Greek 2-year bond yields since January shows what's been happening:

Yields on 2-year Greek bonds, January 2010 to present (Source: ftalphaville.ft.com)

Although no politician is saying this, and no mainstream journalist or analyst is reporting this, and no mainstream blogger is blogging this, this is a full-scale panic, as the prices of Greek's 2-year bonds are crashing, pushing yields up. (Recall that with bonds, yields go up when prices go down, and vice versa.)

What this means is that investors are increasingly convinced that 2-year bonds are going to default, which means that they're convinced that Greece is going to default within two years.

This has really been pretty obvious for several weeks, as we've been reporting on this web site. There's a solid chance that aid won't be provided to Greece in time for their May 19 payment. But even if aid IS provided, then Greece has to continue making payments, and the proposed EU/IMF aid package is only enough for a year. This means that the Germans are going to be asked to write another check to Greek next year -- and the year after that, which means that this whole process would have to be repeated over and over. Today, there's no credible chance that that will happen.

Journalists and politicians begin to talk about a Greek default

For months I've been writing on this web site about the certainty of a Greek default, and the farcical play acting going on in Brussels, as politicians pretend to be working on a way to save Greece, but all the time simply spewing the most fatuous possible nonsense in press releases and press conference statements.

This is just a little nothing web site, so if you're a regular reader, you may be wondering, as I have for years on this and other subjects, why you have to come to this particular web site to actually find out what's going on in the world? Why are journalists and bloggers so credulous that they simply reprint the press release statements of the politicians, who are little more than circus performers?

Well, as credulous as the mainstream reporters and financial experts are, even they are having a hard time going on with this game.

Thus, in the NY Times we read, "Only a few weeks ago, the idea that Greece might restructure its debt seemed like the nuclear option. Now restructuring — a polite alternative to outright 'default' — is not only thinkable, but even likely."

And we're reading even more dire commentary, that a Greek default would mean the end of the euro. FT Alphaville quotes a published note from an analyst at the Royal Bank of Scotland as saying exactly that.

He makes a very interesting technical argument to prove his point, and it has to do with whether or not euro area loans to Greece would be senior to existing Greek debt. What this means is that if the aid package is approved, and enough money is loaned to Greece to meet the May 19 payment, and then Greece defaults anyway, then who will get paid first -- the EU lenders, or the older debtors?

The above is just one example of the complexity of the situation. My reason for presenting it is to show that there is now an active discussion going on about the possibility (or probability) of a Greek "restructuring," or default.

"Some horrendous Keynesian/monetarist nightmare"

Strategists at the Royal Bank of Scotland seem especially contemplative these days, as FT Alphaville quotes a note from another of their analysts.

This note is so "right on" that I want to quote it at length. The author's name is Bob Janjuah:

"Maybe its the return of sunshine, maybe its because I have moved back into my lovely ‘new’ home after 6mths of renting & refurbishment, it may even be because I have accepted that my beloved Liverpool FC now needs some dramatic and radical ’surgery’ if it is ever to be a real force again. Whatever it is, the net effect is that I have spent an awful lot of time ‘reflecting’, just thinking about the world, watching the world ‘get on with it’, and listening to our policymakers and their buddies in the media, in the lobby groups and in the financial sector. My conclusion? Well, I am fast coming round to the idea that (A) I am an idiot (cue the applause!) and that (B) Kevin G may have been right all along [that politicians and investors would continue to act recklessly].

I had assumed, after doing what it took in late 08 and early 09 to avoid global depression and systemic financial system collapse, that policymakers & their buddies would see the light and realise that the only path to long term success for the problem economies (US, UK, most of Europe, Japan, etc) would be a period of Austerity, Balance Sheet repair, Deflation, Real Structural Economic reform and Serious Financial System/Accounting regulation/reform. This path is NOT the easy path near term, but it is the ONLY path for ensuring the long term health and success of the problem economies, as well as ultimately the ONLY path which will both successfully iron out the grotesque global imbalances and help ensure the long term success of the global economy.

SADLY, during my period of reflection, I have come round to the view that we have missed this golden opportunity. What instead I am seeing is a desperate attempt to re-write history (‘there was no bubble’, ‘rates too low for too long had nothing to do with it’, ‘it’s all just the fault of a bunch of greedy traders’, etc etc) AND at the same time it is clear global policymakers and their buddies, whilst jaw-boning us about ‘exit’ and ‘austerity/fiscal repair’, simply do NOT mean what they are saying – in other worlds, they are talking ‘responsibly’ but are acting IMHO in a reckless and irresponsible manner. And in my book actions ALWAYS speaker far more clearly and far louder than (cheap) talk.

The Greece bail-out, the goings on at the IMF involving the huge build-up of ‘new bail-out’ reserves, and all the talk in the UK about fiscal repair based on fantasyland ‘efficiency gains’ are the latest evidence that policymakers EVERYWHERE have no appetite to be brave, to be strong and to do the right thing. It seems that it is clearly too painful to do anything else. Instead, policymakers EVERYWHERE seem to have decided that the only way out of the hole is MORE DEBT, MORE DEBASEMENT, MORE BAILOUTS, ugly INFLATION and/or even uglier STAGFLATION, FAKE AUSTERITY, ZERO STRUCTURAL ECONOMIC REFORM, & MINIMAL REGULATORY REFORM.

We are trapped in some horrendous Keynesian/monetarist nightmare, where policymakers, aided/abetted/advised by their buddies in the media, in the lobbyist cabal and in financial system, have YET AGAIN decided to go down the route which merely delays the problem/pushes it down the road, but which virtually guarantees that when the NEXT bubble collapses (I assume it will be the Global Government Debt/Bond Bubble and/or the Global Fiat Money/Paper Money/FX Bubble), there is NO pleasant way back."

Janjuah is essentially predicting a global financial crisis and market crash. That this is coming is well known to readers of this web site, but it's interesting to see the reasoning that brought Janjuah to this conclusion.

He had actually thought that the mini-crisis that we've had so far, since 2007, would actually be enough to get politicians and bankers and journalists to change their behaviors and actually act responsibly.

But that's not how the world works. The world NEVER works that way. Janjuah blames this on "some horrendous Keynesian/monetarist nightmare," but this has nothing to do with schools of economics. This is a generational phenomenon.

Nothing that's happened in the last three years has caused the greedy, nihilistic Gen-Xers in finance, journalism and politics from being willing to screw anyone for their own gain. Nothing that's happened in the last three years has caused the greedy, incompetent Boomer managers to learn how to lead or manage. The same people who created the crisis in the first place are still in their jobs, still following the same types of behaviors.

A web site reader recently wrote to me about how he understands Generational Dynamics:

This is exactly right. From the point of view of Generational Dynamics, you need a major, existential crisis to change the nihilistic, incompetent behaviors of the politicians, analysts and journalists, and force them to adopt new behaviors just to survive.

It's really not so strange. After all, many times an alcoholic will keep on drinking until the day that he completely "reaches bottom," having lost his money, his wife, his family, his job and his home, and only then will he change his behavior. The same is true of the world today.

Additional links

For the nations of Europe, especially Greece, their geography controls their destiny. NY TImes

I've frequently criticized Paul Krugman for giving up economics to become one of the dumbest left-wing political commentators on the planet. So I was pleasantly surprised to see this article, "Our Giant Banking Crisis—What to Expect," by Krugman and his wife, Robin Wells. It's an intelligent analysis, and contains almost no fatuous ideological nonsense. NY Review of Books

Army of rats invades Manhattan's Upper East Side. No, we're not talking about bankers, lawyers or politicians. WSJ

The Taliban is escalating violence in Kandahar with bombings, as Nato forces prepare to launch the next major offensive of the Afghanistan war. CS Monitor

Hardline Iranian cleric Hojatoleslam Kazim Sadeghi, says women and girls who "don't dress appropriately" cause promiscuity, and promiscuous girls cause earthquakes. "There is no way other than taking refuge in religion and adapting ourselves to Islamic behavior," he adds. CNN

Ukraine marks the 24th anniversary of the Chernobyl nuclear disaster, that changed all of their lives forever. Deutsche Welle

Generational Dynamics Web Log for 27-Apr-2010
27-Apr-10 News -- Greece's bonds are hammered, with yields at 13%

Buffetted from both sides, Angela Merkel delivers conflicting messages

Greek bonds are hammered, with yields above 13%

Journalists and politicians begin to talk about a Greek default

"Some horrendous Keynesian/monetarist nightmare"

Additional links

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	Generational Dynamics
	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 27-Apr-2010 27-Apr-10 News -- Greece's bonds are hammered, with yields at 13%

Buffetted from both sides, Angela Merkel delivers conflicting messages

Greek bonds are hammered, with yields above 13%

Journalists and politicians begin to talk about a Greek default

"Some horrendous Keynesian/monetarist nightmare"

Additional links

Web Log Pages

Generational Dynamics Web Log for 27-Apr-2010
27-Apr-10 News -- Greece's bonds are hammered, with yields at 13%