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Greece Government Bond Market Panic Crash, Yields Hit 18%, Portugal Next?

Interest-Rates / Global Debt Crisis Apr 27, 2010 - 01:53 PM GMT

By: Mike_Shedlock

Interest-Rates

Best Financial Markets Analysis ArticleIt did not take too long for contagion to spread (one day), smack in the face of EU statements that contagion was no risk. Why the EU would put themselves in a position to look so foolish is beyond me. Here is a series of articles to consider.


S&P Cuts Greek Debt Rating to Junk

Greek Two-Year Note Yield Climbs to More Than 17% on S&P Cut

Greek two-year government note yields surged to more than 17 percent after Standard & Poor’s cut the nation’s credit rating three levels to BB+, or junk.

The two-year yield has since hit 18 percent.

Restructuring Would Cause 50-70 Percent Losses

Greek Debt Cut to Junk at S&P, Further Downgrades Possible

Greece had its credit rating cut to junk by Standard and Poor’s and forecast investors would be paid no more than half their initial outlay in the event of any restructuring of debt.

S&P lowered its long- and short-term sovereign credit ratings on Greece to BB+ and B, respectively, from BBB+ and A-2. The outlook is negative.

“We assigned a recovery rating of ‘4’ to Greece’s debt issues, indicating our expectation of ‘‘average’’ (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default,” S&P said in the statement.

Dollar, Treasuries Soar in Flight to Safety. EU Handling "Inept"

Treasuries Extend Gains After S&P Cuts Greece to Junk Rating

Yields on two-year notes fell the most since March 2009 before the Treasury sells a record-tying $44 billion of the securities.

“People are flocking to security,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “They’re seeing how inept the EU is in handling this Greek thing. If Italy, Portugal or Spain has the same problems this could be a real bad situation.”

Credit Default Swaps Hit Record High Portugal Downgraded

Credit Swaps at Record High as S&P Downgrades Greece, Portugal

Credit-default swaps on European sovereign debt surged to records after Standard & Poor’s cut its ratings on Greece to junk and downgraded Portugal.

Contracts tied to Greek government bonds climbed 111 basis points to 821, according to CMA DataVision. Portugal rose 54 basis points to 365. Yields on Greek two-year notes surged above 18 percent, the highest since at least 1998, on concern bondholders will be forced to take losses as the country grapples with the highest debt ratios in the European Union.

German Chancellor Angela Merkel said yesterday she won’t release funds for Greece until the nation has a “sustainable” plan to reduce its budget shortfall. That’s after Greek Prime Minister George Papandreou asked the EU and the International Monetary Fund last week to activate a 45 billion-euro ($60 billion) emergency support package.

Swaps on Greece are up more than eight fold since August and contracts on Portugal are about seven times higher.

“As long as there is no concrete solution, the market will keep pricing in the worst-case scenario,” said Mehernosh Engineer, a credit strategist at BNP Paribas SA in London.

Contagion Hits Portgual

Portugal Suffering Greek Contagion Pressures EU Bonds

Portugal risks becoming the new Greece.

With a higher debt burden and a slower 10-year growth rate than Greece, Western Europe’s poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala.

“We do not ignore that Greece’s particular situation has contagion risks, and we are feeling it,” Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon on April 22. “The performance of spreads in the market reveals that contagion risk.”

While Portugal’s public debt of 77 percent of gross domestic product is on a par with that of France, the burden including corporate and household debt exceeds that of Greece and Italy, at 236 percent of GDP. The savings rate is the fourth-lowest among 27 members of the Organization of Economic Cooperation and Development, according to the Paris-based group’s data.

“The reason we’re concerned about Portugal is not because its public sector debt ratios are excessively high, it’s more that the Portuguese economy doesn’t really grow,” said Kenneth Wattret, chief euro region economist at BNP Paribas SA in London.

Entering State of Blind Panic

Greek, Portuguese Bonds Drop as Downgrades Escalate Debt Crisis

Portuguese, Spanish, Irish and Italian securities plunged and German debt rallied as investors sought safer assets after Standard & Poor’s Ratings Services cut Greece three levels to BB+, or junk, and lowered Portugal two steps to A-. Greek notes slid earlier as concern deepened that the nation will ask investors to accept delayed or reduced debt payments.

“We’re entering into a phase of blind panic,” said Orlando Green, an interest-rate strategist at Credit Agricole CIB in London. “Given the inaction of the euro nations to back Greece and to get things done quickly, we’ve found now this inaction has been a big obstacle. That’s not satisfying for the markets, and not for S&P either; hence, the downgrade.”

No Panic ... Yet

On Sunday I wrote Expect Contagion in Europe, Greek Debt Crisis Will Spread; New Wave of Riots in Greece

Given that the European Commission has been 100% wrong 100% of the time in its ability to yap away the problems in Greece, I take the opposite side of Greek Debt Crisis Won’t Spread Through Europe, Officials Say

That was an easy call.

I do not think we have seen panic yet. However, we will see panic if contagion spreads to Spain or traders start questioning UK debt, or interest rates in Japan. All of those are possible and Spain is likely up next.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


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