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Friday, November 27, 2009

The Greek Euro Drifts Away Towards Oblivion


How long can the Euro carry on pretending? The suggestion that the Euro is truly a single currency gets harder to maintain by the month. There is such a wide gap between the credibility of for example, the Greek Euro and the German Euro, that they have two different Credit Default Swap rates, and different borrowing rates alongside. If the Euro was really a single currency, the rates of all Euro nations would be comparable compared to countries outside the block.

They are not.

This piece from the FT tells the story.

A watershed in the derivatives world could be reached this week: the cost of insuring against a bond default by Greece, using credit derivatives, may rise above the comparable metric for Turkey for the first time.

Just two short years ago, that would have seemed almost inconceivable to most credit default swaps traders, never mind proud Greek politicians. After all, in 2007, the Turkish CDS spread – like that of many “emerging markets” – was trading at about 500 basis points on perceived fiscal risks.

Greece, by contrast, was nearer 15bp, because it was a member of the European Monetary Union, and its euro-denominated bonds were considered quasi-protected by other euro states.

But in the past year the fiscal positions of many emerging markets nations, such as Turkey, have become more favourable relative to the western world. Meanwhile, Greece has plunged into a profound budgetary mess, notwithstanding its use of the euro.

Thus on Thursday – as markets reeled from the Dubai shock and investors fled from risk – the bid-offer spread on five-year Greek CDSs was 201bp-208bp, according to Markit. That of Turkish CDSs was 207bp-212bp, leaving them neck and neck (and according to Bloomberg data, in some trades the Greek CDS was even higher than Turkey).


The next phase of the credit crunch is not going to be banks or families in debt, but countries. Yesterday Dubai shocked the world by defaulting on its debts. Markets in the region tumbled. The LSE was closed for 'technical reasons' preventing a more general rout.

But in truth Dubai is no more in trouble than Greece. If a western country were to default on its debts, the impact would be massively greater, possibly undermining the single currency experiment in its wake. Only if Germany will step in and carry the patient will the Euro survive. And Germany may or may not be willing, or able, to do so.

4 comments:

Anonymous said...

This article is ridiculous.

There are different credit default swap rates between California and other US states, does that mean that the dollar is not a "single currency"?

Hint: the credit default swaps are not in respect to the currency, they're in respect to DEBT of different countries, irrespective of the currency the debt is in.

tapestry said...

Does California borrow dollars at 2.5% more than other States?

California has drawing rights from the Fed which Greece does not have from the ECB.

Greek Euros might be cast out in another year, and not be tradeable with other Euros. I cannot see that happening to California dollars.

It's not quite as ridiculous as you think. Germans don't want to have to pay for the financial sins of its Euro partners. If Greece is a corrupt basket case, they will let Greece go, in the end of the day.

There are then Spain, Italy and Portugal to worry about, as well as Greece. The PIGS.

tapestry said...

From MUnchau today's FT -last paragraph -

Hence Ms Merkel’s idea of a separate crisis management regime. If she is serious about her proposal, she will have to accept that other dimensions of crisis management might need to be included – common financial resolution policies, more effective EU-level bank supervision, fiscal stimulus and structural policies. But there can be no doubt that the eurozone needs a crisis-management regime capable of coping with rough macroeconomic conditions of the kind we face today.

In other words the eurozone doesn't currently possess the structures needed to hold itself together in financial crises such as today's.

Maybe they will assemble these at great cost, but only Germany has the necessary strength to do this. Does she have the will? That is the question.

Anonymous said...

Euros can only be printed as mandated by the ECB. If Greece printed illegally then yeah there could be trouble accepting Greek Euros, then again anyone who decided to do that would probably be prosecuted.