Fisher Investments Editorial Staff
Others

Running on Rumors

By, 01/29/2010

Story Highlights:

  • On Monday, the Greek government raised €8 billion—more than twice their target—in oversubscribed syndicated debt sales.
  • Rumors surfaced China would purchase €25 billion in Greek government bonds, in a deal brokered by Goldman Sachs.
  • Greek leaders assure they will be able to bring their deficit in line without a bailout from fellow EU member nations.
  • Isolated issues like Greece's are to be expected, but they needn't derail the global bull market.

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Between traveling to Davos, Switzerland for the World Economic Forum and keeping a clamp on rampant rumors about their ballooning deficit, it's been a rocky week for Greek government officials.

Sentiment fueled spiking Greek bond yields (10-year yields are up nearly 1% in just three days)* as renewed fears over the government's ability to rein in its soaring deficit spread like wildfire. A week that started on a promising note quickly turned sour amid whispers of secret debt deals and bailouts—and that was just by Thursday! A look back at the tumultuous week: 

On Monday, the Greek government raised €8 billion—more than twice their target—in oversubscribed debt sales. It's estimated Greece needs to raise €54 billion this year to prevent default, so €8 billion in the first monthly sale puts them right on track.

 

Come Tuesday, rumors surfaced China would purchase €25 billion in Greek bonds, in a deal brokered by Goldman Sachs. Turmoil began Wednesday when Greece denied the claims. It's a double-edged sword: Many question why China, with its massive foreign exchange reserves, would stray from a deal to increase holdings of euro-denominated Greek debt. Meanwhile, some EU experts argue the opposite—a deal positioning China as the implicit "rescuer" of a Euro-member country wouldn't sit well among member nations. (Concerns of China holding "too much" of a nation's debt apparently don't stop with the US.)

 

Thursday brought reports of a potential European Monetary Union (EMU) and/or IMF bailout to save Greece, as member nations fear loss of the euro's credibility should Greece default. But the Greek Prime Minister countered this too, assuring markets the government's plan of bringing current deficits (12.7% of GDP) in line with EMU limits (3% of GDP) by 2012 is still feasible. It seems Thursday's assurances fell on deaf ears, as the spread on benchmark 10-year Greek bonds versus equivalent German bonds jumped to the widest since the euro's introduction.

 

It's impossible to say at this point if Greece can successfully bring their deficit in line—with a large public sector and growing borrowing costs, the challenges are just beginning. As we've said before, a Greek default would likely be detrimental for the euro—and the EU has no proven mechanism for issuing support to the potentially failing nation.

 

Rumors aside, isolated issues like Greece's are to be expected, but needn't derail the global bull market. It's more likely this week's brouhaha (and spiking yields) had more to do with sentiment than any escalating fundamental problem. Remember, nothing material has changed since Monday's successful debt sale! This is just another example of how near-term, sentiment can go haywire—and this week, the active rumor mill is likely fueled by leaders, including Greece's, making the rounds at Davos—lots of talk, little action.

 

*Source: Bloomberg

 

*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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