Greece will default

Can\’t see any way that it won\’t:

Greece, Ireland and Portugal enjoyed no respite as investors grew still more reluctant to hold their debt, taking the yields, or returns, offered by the governments\’ bonds to new highs.

The yield on two-year Greek debt passed 25pc for the first time, while yields on 10-year debt climbed further over 15pc.

Note that this is nothing to do with speculators, the ratings agencies, derivatives, credit default swaps or anything like that. It is purely and simply that people are not willing to buy the debt. And why should they, given that it\’s obvious that they\’ll not get paid back what they might pay for it?

7 comments on “Greece will default

  1. More importantly, what is the coupon on said debt? If the 10 year debt was (say) 5% when issued, and now is yielding 15% the price must have fallen by 2/3rds from par. But if the coupon was 10% when issued its only fallen by a third. So what size of haircut is the market reckoning they are going to have to impose?

    Tim Adds: True. But Greece’s debt maturity is very short. I think it’s as low as 2 years on average. So those rates are going to start really hurting pretty soon as debt is rolled over.

    I’ve seen somewhere (can’t remember and don’t know how good it was. Maybe Alphaville and thus a good estimate) that a haricut of over 50% might be required.

  2. Alphaville (april 21) quotes guesses of between 50% and 70% (!) depending on when the barber gets out the shears.
    I can’t see how this would help, though. Countries traditionally default when they reach the “inflection point”, i.e. that sod-you moment when the government at last in fiscal surplus. Greece is a long way from this and domestic purchases of bonds to cover the gap are practically non-existent.
    No sign that the EU is ready to accept what is really necessary: devaluation. However messy and painful, this must happen before Greece can recover.

  3. But it wouldn’t be just a default, Greece would have to leave the euro, and leave it amid the chaos unleashed by the default itself. There would be an obvious impact on the very exposed and not that strong european banks holding sovereign debt, and it could also well trigger a run on other potential defaulters. Although calamitous, and the beginning of the end of the euro as we know it – it would be the beginning of a recovery for a european economy (for which a common currency is more of a hindrance than a help)

  4. Actually, if the domestic market for Greek bonds is dead, it would be nigh-on impossible for Greece to leave the euro in the event of a sovereign default.

    The “inflection point” default would only occur if the Greek government refused to repay while quite capable of repaying. It’s much more likely that the effective interest rate will continue rising such that the Greek government is effectively unable to borrow any more. I think that will happen long before Greece is in surplus.
    Then you will see things like teachers and firemen not getting paid. Or more likely, getting paid in “Greek Euro vouchers redeemable at face value in 12 months time”, which I suppose would count as a sort of partial euro exit.

  5. And why should they, given that it’s obvious that they’ll not get paid back what they might pay for it?

    Agreed. Default will help make future lending more responsible.

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