Thursday, April 29, 2010

Would You Lend Money to Greece at 16%?

The debt crisis in Greece has taken a turn for the worse over the past week. The bailout by fellow European countries and the IMF that was supposedly agreed on weeks ago is apparently more tenuous than widely believed now that Greece has actually asked for the assistance.

As a result, the markets have responded, and not favorably – Greece’s debt was downgraded to junk status this week, causing the yield on Greek government bonds to soar. Their 2-year bonds jumped from an already staggeringly-high 7.7% last Wednesday, to 10% last Thursday, to 13% on Monday, to 15.9% yesterday!!! The market is clearly pricing in the possibility that Greece will be forced to default on its debt.

So, for those of you frustrated by the low-interest rate environment and searching for higher-yielding alternatives to paltry money markets, I ask, would you loan money to the Greek government for 2 years at 16%? After all, that’s 15% higher than a 2-year Treasury bond (see chart below). I’m sure there are some speculative investors out there, hedge funds and the like, that are in fact taking that offer. Indeed, by this morning, the yield was back down to “just” 12.3%, according to Bloomberg.

So far, the situation in Greece hasn’t adversely impacted the financial markets here in the U.S. The S&P 500 is just a few points below its recent high. However, as we know, things can change quickly, so we’ll be watching closely for any signs of a contagion effect, which would pose a serious threat to the current bull market if it occurred.