Friday, April 23, 2010

Greece goes for the aid

It didn’t take long!  Just a day after seeing yields on their bonds soar it turns out that Greece will ask the EU to act on their aid package agreed two weeks ago.  Short update here.

It makes perfect sense for Greece.  Why go to bond markets to borrow the money where the yields suggest that Greece would have to offer a coupon rate north of 8% to attract investors when Greece can go to the EU/IMF and get money at 5%?  Greek bonds yields have fallen back dramatically today from near 9% to just above 8%, and are still falling.  Click the 1D (one day) graph here.

The next development will be when Greece has exhausted the €45 billion currently on offer in aid.  If markets are reluctant to lend now who is to say they will be less reluctant in six months time.  Will the EU/IMF dig deeper and offer further emergency loans to Greece?  Will a default become a more likely scenario?  I think the probability of default is increasing. 

With Greece being only 2% of the eurozone, it does not pose a threat to the euro, but if Ireland and Portugal (in that order!) end up in a similar position this could change.  A similar concern is raised here along with a list of the ten most recent sovereign debt defaults.

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