Fisher Investments Editorial Staff
Media Hype/Myths, Monetary Policy, Globalization, Interest Rates

Greece Got Your Goat?

By, 04/08/2010
 

Story Highlights:

  • This week, Greece's 10-year government bond yields hit the highest level since the EU formed.
  • Fears of a eurozone contagion combined with a downward revision to EU Q4 2009 GDP negatively affected Greek stocks and the euro.
  • Greek banks asked the Greek government to guarantee their loans in hopes of making them eligible collateral for ECB loans.
  • Ultimately, Greece's problems are still Greece's problems and will likely have little effect on the continuing global economic and stock market recovery.

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After a couple weeks' respite, headlines are once again going on about Greece—the country's 10-year government bond rates hit the highest level since the EU formed. Greek 10-year debt now yields 7.15%, more than 4.00% over the 10-year German bund (considered the safest in the eurozone).


Rising along with bond rates are fears of a eurozone contagion, which, combined with a downward revision to EU Q4 2009 GDP, negatively affected Greek stocks and the euro. But, ultimately, Greek problems still appear mostly contained in Greece. For example, while Greek bond yields have skyrocketed, yields on other PIIGS (Portugal, Ireland, Italy, Spain) countries have fallen recently. And though Greek stocks are down -43.2% in USD, the rest of the world is up about +5.2% since mid-October 2009*—the global economic and stock market recovery is progressing nicely, despite Greece's continued woes. 
 

What else took investors by surprise this week? In a new twist, Greek banks asked the government for loan guarantees as part of their October 2008 aid package (€4.5bn of the available €23bn has so far been used). We can see why investors might balk at this. Why have a government that's on the brink of insolvency guarantee banks' debt? Could be a big mistake—or a clever way of opening new lines of sorely needed liquidity if capital markets won't accommodate Greek banks' needs (Moody's downgraded Greek banks last week). Reading between the lines, the banks could seek government guarantees on debt not currently eligible as collateral for ECB loans. The guarantee itself would make them ECB-eligible (there is precedent for this). This could actually be a relatively simple way to get funding without turning to increasingly skeptical private investors. And in the case of a default, the ECB and Greece would likely work out a deal that wouldn't sink the Greek government. 

There may be more twists and turns down this road. But right now, Greece's best course of action is likely the straight and narrow—allow bailout plans to come together, avoid unnecessary bond auctions, and realistically price future offerings. Ultimately, Greece's problems are still Greece's problems, and the likelihood of a contagion, throughout the EU or elsewhere, appears remote—especially with the pledged support of the IMF and fiscally stronger EU members.

 

*Bloomberg, returns from 10/15/2009 through 04/07/2010

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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