Thursday, March 4, 2010

Greece bond sale a success

Well, much to my surprise the Greek bond sale was oversubscribed (albeit at a high yield of >6%). This seems to me to bring the crisis from a boil to a simmer. It is not clear to what the success of the deal is attributable.

Possible reasons are: (1) markets find the austerity package to be credible; (2) markets think the package is credible enough to allow Greece to be rescued; or (3) markets have concluded that, willy-nilly, Greece won't default.

It appears that Prime Minister Papandreou believes that the answer is #2: that the package is credible and therefore merits European help.

Here is what he said today:
Let me be absolutely clear: Greece is not asking for a penny from German taxpayers. We are asking for political support, not financial aid. Currently, Greece has to borrow at interest rates almost twice as high as Germany and other EU countries. Greece must be able to borrow at rates that are not as prohibitively high. Otherwise we will have a difficult time implementing our tough austerity measures. My government is determined to overcome the huge credibility and budget deficit that we inherited.

His view is that market access is not enough; Greece needs market access at reasonable rates. He's undoubtedly correct: Greece's interest burden is too high already without high-yield credit spreads on top of it.

So the ball would now seem to be squarely in Merkel's lap. Reports are that the Germans and the French have a plan in mind, but want to wait at least a few weeks so that (1) the Greeks actually implement their plan, and (2) German public opinion can be brought around.

Papandreou is still in total denial about who caused this crisis: it's not the deadbeat looking for a guarantee, it's the debt markets:
Greece is being attacked by speculators who are putting the entire European project at risk. We need greater coordination and better regulation in order to protect our monetary union from speculation. Greece is the latest--but surely not the last--casualty of leaving financial markets unregulated. While Greek pensioners and civil servants are asked to accept drastic pay cuts, speculators are making billions every day on the back of Greece's problems. This is not about politics, this is about profits.

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