Whilst we in the UK concentrate on the party political ‘sound byte’ broadcast that passed for a live debate, the Greece debt problem continues and the yield on US 10 year Treasury Bills (T-Bills) hovers at just below 4%.
With current bond redemptions due next month Greece is on the hunt for fresh money to replace the old. But with yields on its current debt again rising above 7%, the hope that it could avoid relying on the EU / IMF package looks more forlorn by the day.
Without the ability to devalue, Greece will be looking for either extremely favourable loan rates or for some sort of magical turnaround in their economic fortunes.
It looks like Greece has also scaled back its expectations of tapping a more risk hungry US market for its debt, which in the current circumstances now makes the rescue package the most favoured route. But this money will only see them through the year and at a rate of 5%, which some fear may be unsustainable anyway.
This situation far from threatening Greece’s position within the Euro may, according to Morgan Stanley, force Germany to re-adopt the Deutsche-Mark. According to an Ambrose Evans-Pritchard report in the Telegraph, head of research at Morgan Stanley Joachim Fels has floated the idea that Germany could find better deals if it does not get weighed down by Greek debt risk (not to mention that of the other PIIGS countries of Spain, Portugal, Italy and Ireland).
Although far-fetched sounding, several German law academics are understood to be commencing a legal action to put a constitutional block on Germany bailing Greece out. Should this be successful and Greek debt yields go higher then who one or other may be forced out. And if it is Greece then who is next and what repercussions will that have on Germany?
According to ‘The Alchemist’ writing in Investment Week, with T-Bills threatening to break the 4% yield barrier there is a danger of a flight from equities. “Historically this is a big red flag for investors”. Previous spikes in the bond yield led to equity market corrections in 1987, 1994, 1998, 2000, 2007 and 2008.
The worst may well not yet be over.