By Daniel Griffith, Carnegie Mellon University
Do the Greek financial crisis and the less than enthusiastic reaction from the European Union threaten the future of the Euro as a global benchmark?
Greece issues five year bonds at spreads over 385 basis points more than other sovereign credits.
On January 26th, Greece issued €8 billion in 5 year bonds, at a rate of 3.85 percentage points (an average of 6.2% yield) above comparable 5 year sovereign bonds, such as a German AAA rated bond at 2.5%, in an effort to assuage domestic debt worries. This acquisition comes with a high price, causing the country’s sovereign credit default swap spreads to increase to 410.000- this means that for every €10 Million the government has borrowed, it will cost the bondholders €410,000 to insure. Thus the bond becomes more expensive to own and insure, without an appreciable increase in the yield to investors. One reason for such high rates is Greece’s credit rating, which was dropped last month to A2 (the 6th highest credit rating) by Moody’s, and BBB+ (the 8th highest) by S&P.
Greece is currently seeking to raise €53 billion in the next year to reduce their current debt, which stands at nearly 13% of their national GDP (the highest of the European Union). Financial analysts around the world doubt the true value of Greek bonds, claiming that their debt statistics can be called into question, and the assets are thought to be higher risk than U.S. Treasury notes. And, as most economists would advise, it is not worth selling a risky asset (say, U.S. Treasuries) in order to buy a riskier investment (Greek bonds). So the problem remains, where is Greece going to get the money they need to stay afloat? And at what price will they get it? And, as most economists would advise, it is not worth selling a risky asset (say, U.S. Treasuries) in order to buy a riskier investment (Greek bonds).
In response to this, Greek Prime Minister George Papandrepeou issued statements on January 28th claiming all of the market movement has been brought on by pure speculation, that there is no solid ground for the assumptions towards the high CDS rates- he is, in essence, blaming speculators for Greece’s current problems. In the same statement, he claimed that Greece is not asking for help (specifically from Germany and France), and that the country will not take a loan in the near future, until it has reorganized its domestic operations.
In addition to increasing Greek doubt and instability, Spain has seen constant GDP decline for the last 12 months, with a 4.1% decline in the last quarter. This decrease in productivity has lead to a significant increase in national debt, to almost 12% of GDP, which is closing in on Greece’s numbers. Analysts worry that a continued increase of the Spanish debt will lead to a downgrade of Spain’s credit rating, higher sovereign CDS spreads on sovereign debt, and a lack of funds for the country to pull itself out of the recession.
This rapid increase in insurance rates, along with fear of the same problems cropping up in other European nations, has lead to questioning the stability of the European Monetary Union. As of late afternoon January 28th, the IMF offered a credit line to Greece, in order to bridge the gap between public funding and remaining sovereign debt. This served as a wakeup call to the EU, seeing as they appear unwilling or unable to keep their member nations afloat. The EU quickly countered the IMF’s statement with a response that they will work diligently to find a solution to the funding problem, in an attempt to maintain control over the Union and the Greek financial crisis. The worst the EU could do is let an outside organization overpower them, and engage in its internal affairs, almost inevitably spell the end of the euro as a global financial benchmark.
