Wednesday, March 9, 2011

Greece Can't Seem To Catch a Break - One Step Closer To Defaulting, Files for "Diaspora Bonds"

Greece, a member of the EU and now infamous "PIIGS," simply can't seem to catch a break these days. Austerity measures have proven counterproductive and now last night's latest SEC filing is seen by many investors as a last ditch effort to stave off the inevitable.

Just yesterday, the 8th of March, the ratings agency everyone loves to hate- Moody's, downgraded Greek debt another 3 notches to B1 ("Junk grade", below investment grade) on fears the austerity measures currently in place simply aren't enough to bring spiraling Greek debt under control or to be able to meet EU/IMF bailout requirements in the future. 

Today doesn't look much better for the indebted nation. Moody's has now downgraded 6 Greek banks, including EuroBank, National Bank of Greece (NBG), and Alpha Bank. To make matters worse, the downgrades come with the dreaded "negative outlook" caveat, which signals that more downgrades are likely. This should not come as a surprise to anyone who follows sovereign bonds, such as myself -- the Greek 10yr bond has been skyrocketing since early February and is now touching on 12.92% as I write this. It doesn't look like the situation is about to get any better either. Thus, the move last night by Greek officials to file with the SEC "diaspora bonds," bonds which are specifically directed to the 7+ million Greeks living abroad. In other words, Greek officials just got out the megaphone and screamed, "Calling all patriotic Greeks! This is your country calling! Bring Euros! Now!"

This certainly is seen by many investors as a last ditch effort to stave off defaulting, before Greece is forced to go to the markets for money. However, with the aforementioned bond yield(s) nearing a record and totally unsustainable level once again, the chance of this occurring anytime soon is slim to none. Perhaps if they discover and lay claim to the lost city of Atlantis (a scientific search is currently underway in the Mediterranean, no joke), they might be able to keep the electric on, at least for another month. 

The latest Greek unemployment figures released this morning showed unemployment jumped in December to 14.8%. This is a 5.9% increase from the same period in 2010 and a 45.2% increase from the same period in 2009. It doesn't take a Finance Minister (or PhD from Harvard) to see the trend for the single most important indicator of economic health is clearly in the wrong direction. Which begs the question: What did Finance Minister George Papaconstantinou mean exactly when he said 'Greece was on track and making progress?' Is daily drinking of a bottle of warm ouzo before breakfast a requirement for Finance Ministers?

Considering that the economy is directly responsible for the health of just about everything, including those aforementioned banks, should investors in stocks such as AIB in Ireland or NBG in Greece be concerned with their investments? What will the new EU bank "stress tests" results show? After the results of the last EU bank "stress tests" proved to be entirely worthless, should the new "stress tests" be viewed with more credibility?

Most interesting this time around however, is what The Wall Street Journal is reporting about some details of the tests, which are said to include for "sovereign default." Why would they go that far unless they did expect something? 

Those are some of the questions I will address in the coming days as more information is released and the markets begin to digests the news about the diaspora bonds. I strongly believe a default by Greece is the inevitable outcome. Eventually, the markets will focus their attention back on Portugal and Ireland defaulting. After all, Portuguese and Irish  bonds are already junk in our book. If those dominoes fall, expect to see contagion across the EU followed by Spain finally throwing in the towel. Perhaps when Portugal tries its own "diaspora bonds" you'll know what is coming. Will the ECB be able to contain this mess? Be sure to check back often to see the results. 



  1. Nice article 'J'. There is a meeting this friday between some of the EU nations involved, to address the debt crisis in Europe. Germany is pushing for more austerity measures by the PIIGS before they dole out any more cash. Should be interesting.

  2. @sirmodem- Thank you. I also read about those additional cuts the Germans are requiring from Greece. However, I am hearing word that Finland has rejected all future offers to fund Greece, Ireland, Spain, Portugal et al. Should be interesting tomorrow. I will write an update on this developing story tomorrow.