Wednesday, Apr 21, 2010
The domino wobbles..
Bloomberg: Greece Aid Talks Begin as IMF Signals Debt Threat
Greek 10yr yield has now topped 8%. The Greeks are talking about the EU bailout plan, but the markets are very skeptical..
..the theorists talk about the need for Greek deflation, but given the civil unrest already seen, it is very hard to believe that public sector wages, pensions and benefits can be progressively cut, year after year; without provoking a revolution or military coup..
Greece will probably crash out of the euro before the year is out, and it is likely that the scramble to head off contagion will provoke base rate rises and higher borrowing costs across the developed world..
..wait for it..!
Posted by uncle tom @ 11:40 AM (1131 views) Add Comment
10 Comments
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1. happy mondays said...
UT, what effect will this have on the euro / interest rates & how will that effect the £ ? If they do crash out, do you think that others will follow either by default or choice?
2. uncle tom said...
If (when..) they do crash out, the ECB, BoE & Fed, not to mention the BoJ, will all be on the defensive.
The markets will recognise that they badly underpriced the risk of a Greek default, especially when those who thought they could make easy many selling default swaps find thay have a fat bill to honour. The markets will demand better returns, while the speculators will be looking for the next default..
As one central bank raises interest rates, so the others will feel the need to keep pace, or even go one better. It is far from normal for interest rates to be less than the rate of inflation, so a rapid rate spiral is more than a possibiity..
3. happy mondays said...
Thanks ut.
4. titaniccaptain said...
Would the unmentionable shiny yellow metal go up in these circumstances?..............
5. titaniccaptain said...
Or could it go down?........
6. stillthinking said...
Greek debt can burst the bubble in government bonds generally.
There is no way in the UK that yields should be as low as they are, given that they are essentially unbacked, the only way current holders of UK debt get paid is through the issuance of new debt. After the crash and the flight to safety, bond prices went up as money shifted to government, making them appear even more (falsely) stable priced. When foreign demand for UK debt falls, demand for sterling essentially falls, so the greek default will cause a further collapse in sterling exchange rates, a double whammy loss. I don't see that the UK can raise rates personally because tantamount to admitting a proper default (we can't pay) as opposed to the inflationary default.
So we are getting closer and closer to sterling being shunned. Which leads back to internal deflation on wages and the like, with inflation on imported goods pushing up the price of living. Our destiny in fact.
GB needs to defy gravity for another month and a bit.
7. quiet guy said...
@TitanicCaptain
If you haven't bought yet, perhaps the unmentionable isn't for you. I expect the price to rise over approximately the next five years but there will be some disconcerting downward lurches along the way.
8. uncle tom said...
tc,
Could go either way - better yields on sovereign debt would tend to draw money away, pushing the price down; while greater anxiety always works in its favour..
9. titaniccaptain said...
Thanks QG already bought some
UT......as I thought.... its a question of risking investing in Bonds where one domino has fallen vs the risk of piling into an uncertain BUT apparently suppressed commodity.
10. titaniccaptain said...
Some Links that are sort of relevantish.....OK its tenuous lol
http://blogs.telegraph.co.uk/finance/ianmcowie/100005122/gold-safe-haven-from-shrinking-sterling-and-rising-inflation/
http://www.guardian.co.uk/business/2010/apr/18/goldman-sachs-regulators-civil-charges