GREEK DEFAULT: IT’S ONLY A MATTER OF TIME
Is Greek default only a matter of time? According to the Council on Foreign Relations that’s the story the bond market is currently telling us. Despite unprecedented government intervention the bond market does not appear to believe the problem has actually been resolved in Greece:
“The difference between Greek and German government bond yields can be used to estimate the market’s view of the likelihood of a Greek default. The chart above shows these probabilities over different time frames on three different dates. On April 30th, no European plan was yet in place to address the ballooning Greek debt, and default was considered a real possibility in the short term. On May 11th, just after the European Stabilization Mechanism (ESM) was announced, markets sharply cut their view on the odds of default across all time horizons. However, the market’s analysis of the ESM has become much more nuanced since then. On September 1st, the market’s view of the probability of default within two years was lower than before the ESM was announced, but higher over longer time frames.
Greece will happily borrow from the ESM to avoid having to close its primary deficit (that is, excluding interest payments) too rapidly. Yet if Greece is successful in eliminating its primary deficit, its temptation to default will actually grow, as it can wipe out huge amounts of accumulated debt without any longer needing the financial markets to fund current expenditures. If faced with the choice between paying Greek debts and letting Greece default, its northern neighbors may, once their banks are on more solid footing, find it more attractive simply to let Greece default. This is the story line that the markets are now pricing into government bond spreads.”
This is not surprising. Bond investors are unlikely to sit by idly knowing that the structural problems in Greece have not been resolved. Recent economic data shows that austerity is not working. The problems in Europe are structural and due primarily to the currency system and lack of true unity in the region (see here). European CDS spreads are currently pricing in a 51% chance of default. The European Central Bank appears to have bought some time, however, if the bond market is any signal it’s likely that they’ve merely kicked the can down the road.
the first dominoe…..just as night followed polonius’ day.
Greece is toast, the only question is when and whats the collateral damage?
BTW, If anyone has 15 mins on a lazy Monday, I STRONGLY recommned read Michael Lewis’s latest in Vanity Fair. Utter Brilliance.
Here’s a teaser:
“The second day on the job I had to call a meeting to look at the budget,” he says. “I gathered everyone from the general accounting office, and we started this, like, discovery process.” Each day they discovered some incredible omission. A pension debt of a billion dollars every year somehow remained off the government’s books, where everyone pretended it did not exist, even though the government paid it; the hole in the pension plan for the self-employed was not the 300 million they had assumed but 1.1 billion euros; and so on. “At the end of each day I would say, ‘O.K., guys, is this all?’ And they would say ‘Yeah.’ The next morning there would be this little hand rising in the back of the room: ‘Actually, Minister, there’s this other 100-to-200-million-euro gap.’
This went on for a week. ”
Ok one more:
By the final day of discovery, after the last little hand had gone up in the back of the room, a projected deficit of roughly 7 billion euros was actually more than 30 billion. The natural question—How is this possible?—is easily answered: until that moment, no one had bothered to count it all up. “We had no Congressional Budget Office,” explains the finance minister. “There was no independent statistical service.” The party in power simply gins up whatever numbers it likes, for its own purposes.
http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010?currentPage=all
very good scharfer…
no, we are not greece in the next 30 years, default speaking.
but we will be socially and efficiency wise if we fallow their government takeovers and cradle to grave, self respect robbing social programs.
i am curious. how can one calculate the probability of default from the spreads?
BiBithegerman, in this case the egg es before the chicken.
The CDS spreads reflet the probability of the default investor`s calculation
Is better than a calculation. Is the result of a lot of calculations.