Comments on: Greek Bond Yields

By: Bond. Eoin Bond...

Bond. Eoin Bond... — Fri, 09 Apr 2010 21:38:35 +0000

Greece basically has 9bn in spare cash right now.

They have 12bn in debt maturing over the next 14 days. They have another 8bn maturing in 6 weeks time. They are also running a deficit of around 2bn per month.

So in the next week and a half they will have to find 3bn or so (1bn t-bill auction on monday), and in the next 6 weeks they will have to find around 14bn in total.

It aint gonna happen folks. Greek bonds are being refused for repo’s by some banks, and last week’s syndicated issue was down almost 9% from issue price at one stage yesterday. No one is gonna buy those bonds, and even if they did its going to be at such destructive rates (the May maturity hit 10% this afternoon) that it’ll destroy Greece anyway. There will simply have to be a full on rescue plan enacted, not simply discussed/planned, in the next couple of weeks, simple as that.

By: Greg

Greg — Fri, 09 Apr 2010 16:16:34 +0000

“The downgrade reflects the intensification of fiscal challenges in response to more adverse prospects for economic growth and increased interest costs. It also reflects ongoing uncertainties about the government’s financing strategy in the context of increased capital market volatility.”

By: Greg

Greg — Fri, 09 Apr 2010 16:15:20 +0000

Fitch downgrades Greece to BBB- Negative.

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201004091044dowjonesdjonline000499&title=press-release-fitch-downgrades-greece-to-bbb–outlook-negative

By: Greg

Greg — Fri, 09 Apr 2010 16:03:35 +0000

“The European Central Bank plans to call a Governing Council teleconference this evening to discuss the latest developments, two people familiar with the matter said on condition of anonymity. An ECB spokeswoman declined to comment.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXYMrR0s6.3Q&pos=2

By: Paul Hunt

Paul Hunt — Fri, 09 Apr 2010 14:58:23 +0000

@Greg,

Many thanks again. As a typical final consumer of goods and services - and therefore being at the bottom of the food chain, most of the time I have a reasonably good idea when and how I’m being hosed.

But getting back on thread The Economist has provoked a fairly heated debate on Germany’s role in any bail-out of Greece:
http://www.economist.com/node/15877579/comments?sort=recommend#sort-comments

It seems German voters aren’t prepared to do the Prodigal Son routine. And it may be the perception that Ireland is taking the pain - rather than the jiggery pokey with NAMA bonds and promissory notes (as queried by Zhou) - that is keeping the bond vigilantes at bay.

By: Greg

Greg — Fri, 09 Apr 2010 14:14:57 +0000

@ Paul Hunt

“Someone gets hosed here and I suspect its passive pension fund contributors like me.”

Your pension fund will have medium to long term investment goals.

It will allocate assets by reference to those goals.

The short seller’s objectives are quite distinct from the objectives of the pension fund.

Of course if you are nearing retirement you should progressively allocate your assets to less risky assets. Nothing worse than getting wiped out two days before you retire.

By: Greg

Greg — Fri, 09 Apr 2010 14:08:32 +0000

@ Paul Hunt

The custodian’s duty to the owner of the stock is the safe custody of the stock. The custodian is not an asset manager. On lending they will ensure that owner of the stock will not suffer loss by taking collateral. They will (or should) not lend “willy-nilly”.

The owner of the stock has no intention of selling so has no additional market risk.

The owner will receive interest on the lend.

My expression “custodians can make a turn for themselves” is probably flippant.

They will get a fee for facilitating the lend.

By: Paul Hunt

Paul Hunt — Fri, 09 Apr 2010 13:53:56 +0000

@Greg,

Many thanks for the response, but I am still confused. I can understand how these “custodians can make a turn for themselves” in this manner, but do they not have a fiduciary responsibility to their clients? Surely there is a conflict of interests and a betrayal of this fiduciary responsibility if the custodian makes money while facilitating an activity that is intended to result in a reduction in the value of a stock held in the client’s portfolio. Don’t get me wrong, I’m not against short-selling in principle as an effective means of price discovery. Someone gets hosed here and I suspect its passive pension fund contributors like me.

By: Greg

Greg — Fri, 09 Apr 2010 13:32:49 +0000

Paul Hunt,

“ISLA has over 100 members representing more than 4,000 clients comprising insurance companies, pension funds, asset managers, banks and custodians”

http://en.wikipedia.org/wiki/International_Securities_Lending_Association

An asset manager might lend because it is obliged by its investment objectives to maintain holdings in (say) Irish stocks as the manager offers an “Irish Equity Fund”.

An Irish Equity Fund by definition cannot be 100% “not invested” in Irish Equities.

Custodians can make a turn for themselves by lending out stock held on behalf of clients.

By: Paul Hunt

Paul Hunt — Fri, 09 Apr 2010 10:55:18 +0000

I suppose I might as well display my ignorance and ask the question to which, I suspect, many people would like an answer. What benefit does the holder of a tradable stock or security gain from lending it to a short-seller who is gambling on a price fall and, should this occur, being returned the security at a lower price? I can’t see how the fee paid by the short-seller for borrowing the security will compensate the original holder for the fall in capital value. Or does the original holder of the security make an off-setting bet?

By: zhou_enlai

zhou_enlai — Fri, 09 Apr 2010 09:26:59 +0000

Can anyone explain the mechanism by which hedge funds short-sell sovereign debt? Is it the case that the structures of one or more of
(i) NAMA,
(ii) the recent re-capitalisation of our (literally) banks,
(iii) the debt owed by Anglo,
make it difficult for hedge funds to short-sell those debts, and/or, do the legal differences between sovereign debt and debt owed by Anglo mean that a default on Anglo debt would not constitute a default on sivereign bonds? The same questions apply to CDSs on sovereign debt.

The role of hedge funds and short selling has was massive in the Asian crisis. Is there any chance our division of debt types can protect us somewhat?

By: Greg

Greg — Fri, 09 Apr 2010 08:04:28 +0000

@ MickeyHickey

Got it. Thanks.

By: MickeyHickey

MickeyHickey — Fri, 09 Apr 2010 04:00:40 +0000

The blue margins are a link to FedEx, stay on the white.

By: Celtic Phoenix

Celtic Phoenix — Thu, 08 Apr 2010 23:53:27 +0000

It’s not a great time to be slobbering around with promise notes.

From Bloomberg today:
‘Concern that the Greek debt crisis will infect other indebted European nations helped drive the cost of default swaps on Ireland 12 basis points higher to 172, according to CMA. Contracts on Portugal climbed 13.5 to 176.5, Spain was up 10 at 141 and Italy rose 9.5 to 137 basis points’

By: Greg

Greg — Thu, 08 Apr 2010 19:58:50 +0000

@ MickeyHickey

Bad link.

Keeps sptiing up FedEx adverts.

By: MickeyHickey

MickeyHickey — Thu, 08 Apr 2010 18:03:41 +0000

ECB now accepting junk bonds.
The race to the bottom is on.

http://translate.google.ca/translate?hl=en&sl=de&u=http://www.welt.de/finanzen/article7102325/Anleger-stellen-sich-auf-Pleite-Griechenlands-ein.html&ei=SRG-S7X4EcKB8gaF69j8CA&sa=X&oi=translate&ct=result&resnum=1&ved=0CAkQ7gEwAA&prev=/search%3Fq%3Dhttp://www.welt.de/finanzen/article7102325/Anleger-stellen-sich-auf-Pleite-Griechenlands-ein.html%26hl%3Den%26client%3Dfirefox-a%26sa%3DG%26rls%3Dorg.mozilla:en-GB:official%26channel%3Ds

By: MickeyHickey

MickeyHickey — Thu, 08 Apr 2010 17:42:28 +0000

A link of Google translate (German to English) to an article in Die Welt (The World) a conservative German newspaper on the Greek situation.

By: The Alchemist

The Alchemist — Thu, 08 Apr 2010 15:08:29 +0000

Would be useful to see the Greek ‘black’ economy cash brought into the system. When Italy recently announced an amnesty for ‘black’ money, €95bn was deposited in Italian banks in two weeks. Berlusconi was full of praise for the resulting robustness of Italian banks.

I don’t have a copy of tomorrow’s newspapers to hand but if Greece defaults, I wonder will Europe contract to a slightly broader version of the Hanseatic League? Greece like Ireland has been toying with all kinds of industrial development incentives for years. However, neither country never really had a decent manufacturing base in the first place so the policies were driven by policy makers rather than market makers.

Remember those extraordinary parties of one’s youth, when the music and exotic aromatics never ended? Well they were sore-headed fantasies too. The credit party is over - let’s skip the Quinn group debate - now the question is which guests will be forcibly ejected.

By: Paul Hunt

Paul Hunt — Thu, 08 Apr 2010 12:49:34 +0000

The fuzzy principles of competition, co-operation and solidarity underpinning the EU will be severely tested. The price of allowing an ill-prepared and institutionally weak polity to become a full member of the EU so soon after the rule of the Colonels must now be paid. Is a constitutionally constrained - and increasingly self-interested - Germany prepared to foot the lion’s share of this bill?

By: Eoin

Eoin — Thu, 08 Apr 2010 11:37:42 +0000

I reckon we get some support from Trichet this afternoon and then a real bailout (as opposed to the holding plan done a few weeks ago) from the IMF/EU over the next week. Entire Greek curve now pushing over 7.5%, its probably 150bps north of even stressed-but-doable levels in terms of servicing the debt…

By: Greg

Greg — Thu, 08 Apr 2010 09:45:03 +0000

Difficult to see Greece lasting beyond the weekend.

http://www.ft.com/cms/s/0/edbfc18c-4268-11df-8c60-00144feabdc0.html

“Greece’s four largest banks are seeking government support to help counter a liquidity squeeze resulting from a significant flight of deposits in the first two months of the year.

George Papaconstantinou, finance minister, said on Wednesday that the banks “have asked for access to the remaining funds of the support plan” – a €28bn ($37bn, £24.5bn) government package that was put together during the 2008 global credit crunch.”

By: Paul Hunt

Paul Hunt — Thu, 08 Apr 2010 09:23:37 +0000

Is the market trying to find out what the EU actually means by “support” for Greece?

By: Eoin

Eoin — Thu, 08 Apr 2010 08:59:56 +0000

Bloodbath this morning on Greece btw…5yr +42bps, 2yr +92bps, entire Greece bond curve now well over 7%…

By: MickeyHickey

MickeyHickey — Thu, 08 Apr 2010 01:04:33 +0000

My take on it is that keeping Greece on the edge serves to keep the value of the Euro down vs its major competitors outside of the EU. Germany has to export to prosper and the Chinese are quickly moving up the value chain and will soon put a dent on German exports to the US and Japan. The chattering classes on the currency trading desks are all atwitter about the collapse of Greek sovereign debt. It is a replay of the Vietnam gambit, first Vietnam then Laos, Cambodia and Thailand. Now it is Greece, Spain, Portugal, Italy, Belgium. Ireland is getting a bye I do not know if that is because we are so tiny or we are going to perform financial miracles. Germany is not the only country to benefit from a weak Euro, as France, Belgium, Holland would also benefit. The greed and fear factor must also be reckoned with, if Greece did the unthinkable and walked away from its obligations to the Euro and the EU then the Euro would enter into a tailspin which could prove damaging to the EU as a whole. If Angela sees the Euro in a controlled descent of another 5-10% she might then in agreement with her supporters (Sarkozy et al) come to the aid of Greece in a meaningful way. There are cracks in the German gov’t so they are likely to cave, an imminent crisis would be a useful tool to bring German public opinion on side. Also remember that when a group of countries are staring serious disruption to their economies in the face legality will come in the door as illegality goes out the window.

By: Aiman

Aiman — Wed, 07 Apr 2010 21:09:41 +0000

Greek 2 year yields are available on the Bloomberg link in Karl Whelan’s piece, using the security identifier GGGB2YR:IND.

By: Aiman

Aiman — Wed, 07 Apr 2010 21:07:25 +0000

Check Greek 2 year yields - they’re around 6.3%, versus 0.98% in Germany. Whatever about the risk implied in 10 year bonds of a yield spread of 400bp, (or Greek yields about 2.3 times the German yield), the 2-year yield differential of 530bp, leaving Greek yields in this area 6.4 times those in Germany, is saying that markets expect something very nasty very soon.

By: Ciaran Daly

Ciaran Daly — Wed, 07 Apr 2010 19:20:06 +0000

Even if so Irish economic and political commentary on the role of the euro in Ireland’s downfall is largely absent, it is good to see the Baseline Scenario not ducking the issue in article linked to above:

“The cheap access to money also helped feed the real estate booms in Ireland and Spain. “

By: karl deeter

karl deeter — Wed, 07 Apr 2010 19:13:30 +0000

I think there are several issues playing into this at the same time, one is liquidity, if the market is not trading liquid (not very common on the sovereign side) then you can have problems with price discovery, and that goes for bond auctions as well. I enquired about Greek debt recently with a bond desk I deal regularly with and they shied me away from it - but with an EU guarantee isn’t it a sure thing? Apparently it is but at the same time no. Fixed income is funny that way.

Then you have an EU bailout guaranteed but only if required, in which case the market will take Greece to the pin of their collar on yields (on secondary debt you’d see the correlation via discounts). The market want maximum return and the Greeks want enough liquidity to continue operations, it is only natural that we see yield decompression when compared to Germany [but was surprised nonetheless at that overnight giant step all the same]

This all strikes me as making sense, investors will make hay while the sun shines, buying these bonds has a short term risk on the capital side so yields will need to impress, am I alone on that?

By: Mick Costigan

Mick Costigan — Wed, 07 Apr 2010 17:19:00 +0000

Johnson and Boone pitched in yesterday, invoking Argentina:
http://baselinescenario.com/2010/04/06/greece-and-the-fatal-flaw-in-an-imf-rescue/

By: Greg

Greg — Wed, 07 Apr 2010 15:21:14 +0000

How long will Greek bonds be available as repo collatoral?

Could spin out of control rapidly.