Forecasting the fate of nations has never been easy.
Take for example the story of King Croesus of Lydia, told by Greek historian Herodotus.
In trying to decide upon a campaign against the Persians, King Croesus consulted the great Delphic oracle for guidance. The oracle famously replied that if King Croesus did wage war against the Persians, a mighty empire would be destroyed.
Croesus mistook that to mean the Persian empire, when really it was his own Lydian kingdom that was later extinguished.
With that in mind, we draw readers’ attention to the modern art of soothsaying nations’ fates via CDS prices. In particular, the recent inversion of the Greek CDS structure and what that might mean for the Hellenic Republic in the short term and others in Europe.
As we noted last week, most commonly this is seen as indicating there’s a higher probability of a default in the short-term than in the longer term.
According to analysts at BNP Paribas, something that is curious is the fact that 10-year bond spreads to Greece have narrowed across CEE, when one might expect them to rise in tandem reflecting contagion risk.
In other words investors are betting only one empire will be hit by a Greek default — the Hellenic Republic itself — and that in comparison CEE securities are a safe bet.
As they noted on Monday:
What is particularly interesting this time around is that so far there has been barely any reaction in the CEE area as currencies have been pushing hard to strengthen through crucial resistance levels.
Additionally, local bond markets have seen elevated interest from international money managers to buy longer dated papers, despite the fact that 10yr Greek papers are offering just as high yields as in Poland.
Admittedly, fiscal problems in Greece are hardly something new but from the positioning point of view, there is a risk that some longer term euro-based investors might chose to allocate into Greek assets, assuming of course they believe that the country will eventually be bailed out.
One important distinction between Greece and CEE is that the latter has been heavily supported by international financial institutions, including the IMF, which along with the correction in external balances has lowered external financing need. Therefore, it is possible that it will be bond markets that will more closely follow the news-flow from Greece rather than currencies.
The differentiating factor this time round therefore seems to be the known element of existing IMF support, versus the unknown element of what support, if any, Greece receives.
Related links:
Greece default or no? – FT Alphaville
Greece is the word… – FT Alphaville