Greece’s 10 year has soothed down tremendously, now trading inside of 10% yield, just above 8%. It was above 30% just this time last year.
It appears that a Greek default has been taken off the table. If anyone actually made a pile of money on that move (as opposed to averaging down or getting back to even) well then, I congratulate you. I certainly wasn’t going to touch it.
So what happens now?
Well, 8% is still very expensive. Greece has a host of problems mostly stemming from economic contraction and, I suppose if you really believe they even tried to implement any, austerity. And I believe the europroblem demands further attention and, most importantly, central bank intervention. If the EU ultimately holds it together, or if they decide to part ways, the euro will need to be accommodating in either case.
Now I think it was a year ago, I ran into a piece that was analyzing the behavior of countries who had debt market problems – I can’t quite remember who was the author.
But the gist of the material was that countries actually don’t tend to default on their obligations in the middle of the crisis. They wait until they have things under control and are in a more stable position. And that’s when they look at their books and realize how well they’d be doing if they didn’t have to be making payments.
It’s when the country is in a good place that they actually hit the switch.
The study looked at places like Russia and Argentina and the defaults they underwent; which were largely unexpected.
Another paper I was able to track down comes from Stanford University, authored by Mr. Tomz and Mr. Wright. The good folks at Stanford found that countries do default more during the middle of crisis, but that the correlations was remarkably weak: http://www.stanford.edu/~tomz/pubs/TW2007.pdf
In any sense, the development in the Greek bond market is a remarkable turnaround. I am not convinced that we’ve seen the last of the consequences to come from the last twenty years. And I would not be surprised if, at some undisclosed time in the future, the market was ear holed by a surprise default from at least one of these countries.
But at present the Greek turnaround is incredible to watch. One can only marvel at it all.
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Thanks for sharing this. Spanish and Italian bond yields are also a couple percentage points lower than last year (and certainly not attracting the same attention).
Appreciate your help here in reminding me to avoid complacency just because we aren’t in full crisis mode.
Great piece as always sir.