If it’s possible to add drama to the crisis over Greek bonds, Hong Kong-based research house Gavekal makes a good effort on Friday, with a note that begins:
A few days ago, a friend expressed to us the opinion that the 300bp spread on Greek bonds would be like the 300 Spartans of Thermopylae: the unbreachable line which would prove to be Greece’s salvation. As it turns out, 300 proved to be more of a Maginot line. However, the fight currently going on in the bond markets could, like Thermopylae, prove to be a battle that changes the world…
Literary hyperbole aside, the fact that Greek bond yields have now surged nearly 150bps in just one month to reach an absolute high not seen since 1999 raises some “very serious and important questions”, Gavekal notes.
Indeed. Questions such as, what could a political solution be?
The answer according to Gavekal is simple: “There is none”. So, it says:
If Europe wants to save Greece from hitting the wall towards which it is now heading, the European commission, the ECB and/or other institutions (IMF?) will have to bend the rules massively. In turn, this will likely lead to a further collapse in the euro.
But the greatest question of all concerning Greece’s crisis highlights a wider problem, as Gavekal co-founder Charles Gave pointed out:
Specifically, the market in recent months has assumed that Greece, Portugal, Spain and most other OECD countries would have a few years to put their budget in order. As far as Greece goes, it is becoming obvious that the markets have decided that the new government will not have the luxury of time. So is this a one-off or the start of a new trend? If the latter, the downward adjustments in government spending could be a lot more brutal than everyone currently anticipates; think Thailand in 1997 and Korea in 1998.
Related links:
In-depth report: Greek debt crisis – FT.com
Going Greek – FT Alphaville
Mohamed El-Erian: Greece part of unfolding debt story – FT