The views expressed in this column are solely those of
the author and do not reflect the views of SVB Financial Group, or Silicon
Valley Bank, or any of its affiliates.
the final countdown
Ron White of Blue Collar comedy fame has claimed that
“people learn things” when he drinks. As
an example, he cites the time a cab driver learned that when Ron says, “I gotta
yak,” it doesn’t mean he has a hairy buffalo tied up in his backyard.
Different phrases mean different things at different
times. Such is the latest lesson coming out of Greece pertaining to the word
Last Monday, S&P celebrated July 4th by
stating if the recently proposed restructuring plan goes through, the country’s
bonds will be in “selective default.” When the markets opened Tuesday, however,
there was a strange and eerie silence on this topic as if no one cared. Except
for the European Central Bank (ECB).
The ECB had previously committed that they would not
take “defaulted” securities as collateral for loans. They now feared that if
the Greek securities were in “selective default” they would not be able to lend
against them without risking credibility.
Nothing had changed to affect the actual description or
cash flows of the securities in question.
But the ECB didn’t want to be seen as going back on their word.* It’s
strange how a single word could be powerful enough to outweigh the fact that
nothing had changed — nothing except the label of “default.”
The markets, for their part, ignored this little bit of
paranoia, betting that in the end the ECB would find a way to lend against the
new Greek debt, anyway. Greek 10-year
bonds fell just less than 1 percent from 55.28 cents on the dollar to 54.89 as
the yield rose to more than 16 percent.
However, with austerity measures approved by the
government, the Greek can is very close to being kicked down the street once
= Junk (?)
The following day, July 5, Moody’s
downgraded Portugal’s debt to junk status.
This shouldn’t matter much either as it is widely
believed Portugal will get the help they need. Unfortunately, the markets
heartily disagreed, driving bond yields up dramatically. My favorite description of the spike in
yields came across CNBC: “The Greek 2-year bond has gone up by a U.S. 10-year!”
The 3.55 percent yield spike from 12.33 percent to
15.88 percent during Wednesday’s session likely includes a period where the
bonds were “no bid” for a short period.**
Given the tiny size of these markets (only measured in
billions, not trillions), it’s obvious the market is focused on contagion risk —
and contagion risk only.
In Spain — widely believed to be “next” — 10-year bonds
drifted only slightly higher from 5.39 percent to 5.61 percent through
Thursday, evidence that contagion is not yet fully in effect, but perhaps on
in the week, the ECB did relax their lending standards. But, to me, it’s odd that a true “lender of
last resort” would ever be able to maintain significant credit standards. Isn’t lending to borrowers facing such
difficult times what being a “lender of last resort” is all about?
means different things to different people, but in the bond market when demand
leaves the equation entirely, bond prices can drop in the tens of percentage
points immediately. Bidders simply
disappear and in the over-the-counter nature of the bond market where no entity
is required to bid, prices can plummet by 10 – 80 percentage points from one
trade to the next. In the case of Greek
bonds last week, if this occurred, it was short-lived.