Greek bond market collapsing; contagion risk

The news started today with S&P downgrading Greek bonds to junk. It wasn't just the sovereign debt that became junk, but also the debt of many of the major Greek banks as well.
This dramatically increases the risk of default because junk rated bonds cannot be swapped for Euro-backed bonds, and this has markets very worried.

Investors in Greek bonds may get back between 30 percent and 50 percent of the value of their holdings should the government default or restructure its debt, S&P said.

The yield on a two year Greek note is nearly 19%, a completely unaffordable level that effectively locks Greece out of the global debt markets. The only alternatives left for Greece are bailout or default.

The race to get money out of Greece has become a self-fulfilling crisis. The Greek stock market has dropped 22.7% y-t-d and crashed 7% just today.

Like most financial crisis, it spills over borders.
Portugal's debt was also downgraded today from A plus to A minus. In response, the spread between German bonds and Portugal's bonds reached 5.51%, this highest since the creation of the Euro.
Lisbon's stock market plunged 5% today and is down more than 15% y-t-d.

The contagion is already being felt in Spain, where the stock market dropped 4% today, and is down 12% y-t-d.

A senior Lisbon banker said: “The problem is not Portugal itself, which is in a much better fiscal position than Greece, but the possibility that the Greek crisis could spread by contagion to Portugal and then, much more seriously, to Spain.”

Spain has a much larger economy than Greece or Portugal. If Spain were to collapse the entire Euro monetary system would probably collapse with it.
Concerns about the future of the Euro caused it to fall against the dollar today after Germany's FDP hinted that Greece might have to temporarily leave the Euro.

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slow motion implosion?

I knew the C Word was coming on this. That's just unreal, 19%, wasn't it 13% or 12% yesterday?

These credit downgrades, while we're railing on the complicity of synthetic CDO fictional ratings, sovereign debt ratings really concern me because it can cause an entire country to implode.

What else do you have on Contagion here, is it a triggering of the yields and then the currency swaps that causes the downgrades of other nations and kind of just spirals into implosion?

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History Repeats

I'll wager this action in Greece was prefaced by movements in the Credit Default Swaps markets. The same thing was happening the market in the summer of 2008. The swaps went higher and higher, then there was talk of illiquidity and bankruptcy etc. Media picks up on things and the stocks went lower. Then there are downgrades and soon - puff, gone.

This drove some of the banks out of business and came close to killing GE Capitol.

Big investors stand to gain here by killing Greece. 'They' know about it and still it happens. One of those investors is no doubt Goldman who still operates with impunity despite supposedly being on the radar. Its all smoke and mirrors.

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Jim Donahue, you are

Jim Donahue, you are absolutely right about 2008. Check out this website:

http://www.bondsquawk.com/2010/04/a-tale-of-two-markets/

The CDS markets were widening but stocks didn't move as much.

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GaSP. (G)reece, (S)pain, (P)ortugal

If it's not Greece, then it's Spain or Portugal that will take down the Eurozone.

I'm thankful that the most powerful leader in Europe is Merkel. She's making some hard and unpopular decisions regarding how to handle Greece. To clarify, it's unpopular with leaders NOT residents of Greece or Germany. It's great for Europe and the world that Europe has a leader who is willing to make the right calls - primarily, no bailout (thus far anyway). I wish our leaders here in the US had her guts. Instead, they drop to their knees at any whim in which to give away taxpayer dollars.

Praise for Merkel aside, if I recall, the next payment due by Greece is 10 May; personally I believe that Merkel will cave on 9 May and agree to bailout Greece. Although it would be better for everyone if Greece is allowed to fail.

The irony of this matter is that Germany's only REAL choice is: Who should we permit to destroy the Euro? Greece, Spain, or Portugal.

It seems that America started this "bailout mentality" and unfortunately, the world was watching and listening. It's nice to be a world leader - but it's too bad that when the "world leader" jumps off a cliff, the world follows without asking why.

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Spain debt downgraded

One step to AA, with a negative outlook.

If only the rating agencies were as vigilant about corporate debt as they are about government debt.

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Euro bond yields exploding up

It looks like the crisis is propelling itself now.

[Y]ields on Greek two-year notes jumped to a record 26 percent ... The yield soared almost 600 basis points at one stage today. Ireland’s jumped 90 basis points to 4.64 percent, Portugal’s increased 93 basis points to 6.24 percent and Spain’s rose 20 basis points to 2.26 percent.

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is this "it"?

The big "C" (contagion) and maybe a U.S. ramification post to give more info. I just looked over in our middle column and there, all of our financial bloggers headlines are switching from Goldman Sachs to Sovereign default/PIIGS.

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Time has run out

That doesn't mean there won't be a quick band aid solution applied.
A friend of mine once told me, "Never underestimate the ability of the powerful to manage a crisis." That's different from actually "fixing" anything.

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band-aids

That's been the ongoing activity for months now. I'm just wondering when they will run out of them, which might be now.

Then, I saw a claim (unreal) that all of the past defaults, problems like Mexico, Russia, Asian Crisis (Thailand, S. Korea) had "little effect" on the U.S. (due to DOW/NASDAQ)

I don't think this is the same thing here. The U.S. was flush with cash when those happened and the IMF as well was.

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band-aids are cheap and easy to make

The band-aids will continue to be manufactured. No world leader is willing to make the decisions necessary, which in simple terms, is to not go into deeper debt to solve a debt-related problem. We've all seen how Merkel was berated by everyone (including US leaders) except most Germans for constantly saying no to Greece. However, as we've seen and I think we all knew, she is caving in and giving of Germany's funds (and sovereignty) to save Greece. As long as there is money, there is a band-aid; until the money disappears, cannot be printed, cannot be borrowed, cannot be forced through higher taxes, etc then nothing will change. The bailouts will continue. It's just that simple.

We're on a financial crash course but no world leader, especially the US, is willing to admit that our course ends in disaster.

You're right Robert, "...they will run out of them, which might be now". But band-aids is not what we've run out of; it's 'time' that we're out of.

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Whats Wrong With Greece Defaulting?

Who benefits from a bailout there? Which banks are deep into Greece for loans etc? Those would be the losers.

This is what should have happened in the fall of 2008 on a worldwide basis. The big over extended banks should have been allowed to sink.

Whats the worst that could happen? A barter economy for a period of time? Great no taxes.

It would be nice to see some suits starving to death with no real skills that anyone really wants with their artificially created demand dampened. Almost everyone I know knows how to do something that would be in demand.

The banks were and are desperate to avoid seeing anything like that since they would be exposed.

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A barter economy?

While I have zero sympathy for the big banks, and have moved my own banking business away from them, I cannot see that "a barter economy for a period of time" would be the sort of no big calamity thing that Jim Donahue presents. I think it would be horrendous for the people subjected to it because it would be, literally, the end of civilization. No taxes as an advantage? Well, no taxes means no public safety personnel (for starters). The chaos and resultant suffering are mind-boggling, and I don't think even the Greeks deserve that.

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Ray Joiner

End of Civilization?

Civilization is based on a barter economy. The artificially created currencies have become more than what they were designed to barter.

The money itself is the end game now not the barter for things that people actually want and need and thats a big part of the problem here.

Horrendous for people that have no real world skills. It would be great for people that actually create things that people want and need. Things are out of whack when money is the end game rather than what the money is being provided for. When the money handlers make more than those that create things people want and need.

Just to add that it was Bernanke and Paulsons 'the sky is falling' scenarios that prompted the bailout in the first place. The failure of a few big banks were going to cause riots in the streets and starvation among the masses. I call BS on that.

The bailout, which was paltry in comparison to what the Fed did for its owners, was cover for the Feds actions. While the masses complained about three quarters of a trillion in taxpayer funds trillions and trillions were made available for those same banks. Now they are hiding inflation in any way possible. That will change once they assume its safe that inflation can't be tied back to the bailout and inflation will roar here like never before.

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France & Germany Bailing Out Their Banks Not Greece

Several articles are pointing out that rather than unsellable bank bailouts German and French politicians are bailing those banks out through the Greek bailouts which is an easier though still unpopular option.

I'm betting Merkel changed her mind under tremendous pressure from German banks that were close to losing a ton of money.

The banks get their money right away rather than a series of payments.

Taxpayers payout to the banks again.

French & German Banks Being Bailed Out

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markets tanked today on this

they don't believe this is enough or that it will stop contagion.

Jim, you might try venturing into the world of blogging by writing an Instapopulist sometime. Some of your comments are so good, details, they are really mini-reports.

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