Looking for a decent income from the bond market?
You’ll have a tough time of it. Yields are at pitifully low levels in most areas. These days, you even have to pay many governments for the privilege of lending to them.
But if you’re willing to send some of your money to Greece, you can now get a double-digit yield. Greek bonds maturing in July 2017 yield more than 25%.
Of course, there’s a very good reason for that. There’s a good chance you either won’t get paid back – or that you’ll get paid back in a different currency altogether.
IMF to Greece: you need to cough up
Yields on Greek government bonds have shot up this week, even while the European Central Bank’s money-printing process has continued to drive the yields on most European bonds down to negligible or negative levels.
What rattled the markets this week? The FT reported that Greek officials had informally asked the International Monetary Fund (IMF) if they could have a bit of extra time to repay loans to the group. There’s a €747m payment due to the international lender on 12 May.
The IMF politely declined. Christine Lagarde – head of the IMF – said that they haven’t rescheduled a payment in 30 years, and that allowing delays in the past was “not followed by very productive results”.
She added that Greece basically needs to get its head down and work on pushing through some genuine, sensible, workable reforms that will put the economy on the straight and narrow – or something approaching it at least. In other words, stop all the political grandstanding and start doing some of the boring, difficult stuff.
There’s another talk due about all that ‘boring’ stuff in 24 April. Greece is still hoping to get more money out of the ‘troika’ – the eurozone bailout team that includes the IMF.
But people are now talking openly about no deal being possible. The IMF’s chief economist has said a Grexit would “not be smooth sailing, but could probably be done”. Meanwhile, Germany’s finance minister, Wolfgang Schauble, said in typical blunt fashion: “Nobody expects there will be a solution… you can’t spend hundreds of billions… in a bottle without a bottom”.
Philippe Gudin of Barclays tells the FT that “the probability of a Greek exit is higher now than it ever was, even if a no-default ‘muddle-through’ remains our baseline forecast for now”.
So what happens now?
Will Greek voters choose the euro plus austerity, or the drachma?
As per usual, this situation is all about politics. And it’s the age-old problem with the eurozone – can membership of the union trump national self-interest?
The Greeks voted in Syriza as a protest against ‘austerity’ and being told how to run their economic policy by outsiders. But they didn’t vote in Syriza to return to the drachma. In short, they want to have their euro cake, but they want to eat it as well.
That’s not an option. The IMF can’t give Greece an extension that it has denied to many emerging nations in the past. On top of that, German voters are getting fed up. A poll cited in the FT says 44% of Germans favour Greece leaving the euro, versus 20% who back its continued membership. That’s pretty decisive.
German chancellor Angela Merkel can’t ignore her constituents’ desires any more than the Greek government can ignore theirs. So it boils down to this: will the Greeks allow Syriza to compromise on austerity – basically, accept the troika’s conditions – or will they accept that the only way to get what they want is to leave the eurozone?
There are hints that Syriza would like to compromise. There’s talk of going to the country with a referendum. But time’s running out, and the more the Germans see the Greeks as messing about and playing for time, the more likely we are to see Greece end up heading through the exit door.
This might not matter. In the medium-to-long term, an exit could help Greece out. The drachma would collapse and Greece would look cheap to international investors and consumers.
Then again, if Greece decides to stick with the euro, that might help it too. If the country could force itself to adopt a functional tax collection system and just generally be more fiscally disciplined, then maybe that’d be a good thing too.
Trouble is, we have such a jittery financial system at the moment. Everyone is on edge. Anyone with any sense knows that we live in a weird, distorted financial world. There’s definitely a hint of 2007 about all this – people working in finance have a general ‘bad feeling’, but there’s no precise idea of where the breaking point is in the system.
It would be ironic if Greece – five years on from first becoming the biggest panic point in the eurozone – did finally prove to be the straw that breaks the financial system’s back. If you haven’t already checked out my colleague Tim Price’s nightmare scenario for markets, you can learn more about it here.
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