Greece, a member-country of the Eurozone/EU with 388 billion euros in public debt and a deindustrialized economy, is in danger of paying dearly for the EU sanctions imposed on Russia. The debt of the General Government of Greece, despite being sustainable in the medium term, despite being supported by the ECB and despite the fact that only 80 billion of this debt is owed to individuals, continues to be a high risk asset.
The picture of Greek government bonds is clearly the worst if we take into account the spread of the yield difference between Greek and German reference bonds but also if we take into account that 70% of the debt comes from institutions such as EFSF, ESM, transnational loans etc.
The performance of Greek government bonds in the current period is similar to the era of Capital Controls in 2015.
The worrying data?
The Greek 10-year bond in the current period (beginning of May 2022) has a yield of 3.40% with the 10-year German – which is the reference bond in Europe – having an interest rate of 0.96%.
The difference between these two odds is called the spread and amounts to 244 basis points or 2.44%.
At the beginning of 2018, the Greek 10-year bond had an interest rate of 3.70% and the German 0.96% with a spread difference of 274 basis points.
These data come to prove that ultimately the bonds that are the mirror of an economy show that investors are worried about the Greek risk. The rise in bond yields is definitely a global phenomenon. However, Greece in terms of spread has one of the worst images and despite the fact that only a small part of the debt is negotiable. In essence, Greece of 2022 has a similar picture to Greece of 2018.
Also, Greece can not borrow from the ESM with an interest rate of about 0.8% and in the 10-year bond to see yields of 3.40%? If the 10-year bond of the Greek government exceeds the yields of 3.6%, the sustainability of the public debt of Greece is endangered (for more analysis on the sustainability of the public debt of the member states of the Southern Eurozone, please read the analysis title “The South Eurozone on the Red Line due to Explosion of Borrowing Cost“).
However, this negative image with the yields on government bonds will be global e.g. Given that our estimates are that the 10-year US bond from 2.97% will jump to 4%, perhaps even higher close to 4.5%.
This means that most countries, especially Greece, will henceforth borrow heavily from bond markets. However, from now on, Greece will have to manage a constantly deteriorating situation. Lending opportunities for government bonds but also for corporate bonds will gradually begin to close for countries such as Greece, e.g. no bank in Greece or a large company can issue a corporate bond because the terms will be manipulative.
The window of opportunity will remain closed for a long time and countries with troubled fiscal data such as Greece will have to look for alternative scenarios or accept that they will pay on worse terms to borrow.
It should be mentioned that as long as the GDP growth rate in Greece is higher than the cost of borrowing in the 10-year benchmark bonds, there will be no problem in debt sustainability. But this will not continue. Borrowing costs will soon exceed GDP growth rates. Rising inflation reduces nominal public debt levels but makes the cost of living in a country very expensive, leading to a contraction in aggregate demand in the economy, thus reducing any growth rates.
The crucial dates for interest rates at the Fed and the ECB
FED
May 3 and 4, 2022 – estimated increase of 0.50%
14 and 15 June 2022 – estimated increase of 0.50%
26 and 27 July 2022
20 and 21 September 2022
1 and 2 November 2022
13 and 14 December 2022
ΕΚΤ
June 9, 2022
July 21, 2022
September 8, 2022
October 27, 2022
December 15, 2022
