Should Greece Trust Markets and Default? Which Market?

 
1.0 Cross-section Comparison

Source: BarCap

1.1 Greek Debt Profile and Future Maturities

T-BILLS BONDS
YEAR BOND
ISSUED ISSUED PERCENT
OF MATURITY
(MIL (MIL FLOATING
ISSUE (YEARS)
EUR) EUR)
2009 14,560 60,589 7.25 18.30%
2008 1,788 35,736 6.66 15.67%
2007 1,364 46,527 18.5 0.60%
2006 1,804 24,562 7.11 11.11%
2005 2,072 40,416 13.4 14.56%
2004 2,273 32,526 7.81 13.37%
2003 1,702 33,004 9.94 1.00%
2002 1,471 31,713 10.36 2.21%
2001 1,178 10,041 8.21 4.86%
 

Looks like Greek stress won’t be really over until the end of 2014. Sort of.
Background: CDS curve intuition

2.1 Steep = Normal way of things

2.2 Flat = Costly in the near-term

600
500
400
Bps

300

High default risk in the

200

near-term... ...and uncertainty regarding the timing of event.

Very little information shown in tenors...
100
0

0 1 2 3 4 5 6 7 8 9 10

Tenor

2.3 Inverted = inversions are always bad

700
600
500
Bps

400
300
200
100

Imminent default priced in short term... Post-crisis, the entity may be less risky
0

0 1 2 3 4 5 6 7 8 9 10
Tenor
The Greek flash point: January 2010

3.1 January Cash Bonds: Steep. February: Not so much. Click on source link for details.

Source: http://www.zerohedge.com/article/greek-treasuries-pancake-bond-vigilantes-chant-death-chorus

3.2 In January the Greek CDS curve (Red line) inverted while the bond curve was still steep.
3.3 Another look at the divergence mid-curve on

Source: Credittrader

These curves don’t seem to tell the same story in a crisis situation. Chart says bond curve
got more worried, and the CDS curve was … what it was in January. It seems that the CDS
market reacted to the bailout news, while bonds continued to sell off. Differences in the
curves at other times are reflections of inflation expectations and non-credit idiosyncratic
risk. Neither curve is pricing in magical lightning from Zeus’ butthole that miracles billions
of euros.

So… does the CDS curve overreact, or is the bond market just slower to process credit risk
information?

Either way, there needs to be some benefit for the nation and household that at least tries
to stay true to its word and bond under stress. Otherwise, CDS curve inversion will become
a market signal for immediate strategic default signal.

Seems that all Greece has to show for their trouble is higher interest costs on a mountain of
issuance coming up. On a global scale, aggregate debt repudiation either through inflation
or default will be the endgame.