Streetwise Professor

March 11, 2012

Sarko Whistles Past the Graveyard

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 3:39 pm

Nicholas Sarkozy said this about Greece: “”Today the problem is solved.”

Uhm, not so fast, Sarko.  The Greek economy is imploding.  The political situation there is still fraught.  The feasibility and credibility of the austerity pledges are highly questionable.  Realistic forecasts suggest that even with the 100 billion or so (largely coercive) writedown in government debt, Greece’s obligations are not sustainable.

The markets are already giving their verdict.  The new Greek debt (to be issued to private holders of the old debt) is trading on a when-issued basis at very high yields:

Markets showed investors have no faith that the bond swap will draw a line under the country’s troubles. Under Greece’s austerity and reform programme, its debt burden in 2020 should fall to where Portugal’s is now.

If investors believed Athens could succeed, yields on Greek and Portuguese bonds should be similar. But on the grey market, the new Greek bonds were yielding 17-21 percent, far above Portuguese levels around 11-14 percent.

And it’s not like Portugal’s yields are any great shakes.  Indeed, Portugal is itself at serious risk of default.

What do 17-21 percent yields mean? Here’s what they mean:

Initial quotes in the “when-issued” market for the new Greek 2042 government step-up bond range between 17% and 22% of face value, according to traders with knowledge of the matter. Small-sized trades are going through the broker market as dealers “test the water,” according to one trader.“We are quoting the new 2042 bond between 20 and 22 cents to a euro…there is some interest to trade these securities but volume is still quite small,” said a London-based market maker.

Sarkozy is whistling past the graveyard.  Official European entities, like the ECB, are Greece’s primary creditors.  All of Europe is on the hook for its debts: the effective subordination of the new debt in private hands is a main reason why the new debt is trading at such heavy discounts, but even given the senior status of Greek debt in official hands, it is unlikely those official creditors will receive full payment. Given the imploding economy and potential for political backlash in Greece, it is rather naive to think this is solved.  This may be the end of the beginning, but it is nowhere near the end.

Europe might have bought some time, but the key thing is what they do with it.  Sarkozy’s confident statement suggests they may well be wasting it.

Print Friendly, PDF & Email


  1. If a mystery attacker pelts you with tomatoes we will know the long arm of Sarkozy has reached out to silence you.

    Comment by Charles — March 11, 2012 @ 4:53 pm

  2. with 21% unemployment and a continuing meltdown in Spain the financial crisis may be morphing into a political and social one. A little early to declare victory.

    Comment by sotos — March 11, 2012 @ 5:20 pm

  3. […] Sarko on Greece, “Today the problem is […]

    Pingback by FT Alphaville » Further reading — March 12, 2012 @ 2:23 am

  4. Actually he said that the entire euro problem is solved, not just the Greek bit. He’s a populist on a tough election campaign, it’s not a time for facts or a long view: nobody gets elected by throwing balanced and truthful analysis at voters. If you want to read something in his pronouncements, wait for the post election version, if he gets reelected.

    More generally I think the european governments do know it’s not over, and are happy with it. From a political expediency viewpoint, haircuts are better delivered in installments. It could actually be counterproductive to solve the problem too quickly (popular digestibility, moral hazard, loss of leverage on banks, etc).

    Comment by cig — March 12, 2012 @ 2:31 am

  5. Short on Stature, short on ethics, short on ideas…..

    Comment by francophile — March 12, 2012 @ 4:31 am

  6. A little late getting to this post, Prof. Excellent, as always.

    You and “ciq” are spot on drawing attention to this issue (no pun intended). The markets are, among other things, casting their collective votes on the new-normal market for euro debt: more than anything, this “market” is an arbitrary beast, and a lot of risk premium has to be built in to handle unlikely political outcomes. Governments (and psuedo-supra-governmental agencies like ISDA), central bankers, treasury officials and at-risk banks and other counterparties now jostle to control the outcome of what started as a market-based process — i.e., trading of bonds with prices, coupons, rights and obligations memorialized in contract form — in the “developed” economies, because whoever can gain control of the resolution process will dictate who gets paid, how much and in what form. This type (and level) of moral hazard is killing off different transactional venues, to the detriment of everyone.

    Who in their right mind would venture in to the “market” for euro sov debt? Even if it’s German? This makes financing the re-building of Greece, and the other basket cases over there, prohibitively expensive. So investment won’t occur. Productivity won’t improve. GDPs won’t grow. The options for resolving this conundrum dwindle daily.

    Comment by markets.aurelius — March 13, 2012 @ 4:41 am

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress