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Positions In Europe: Long Germany (EWG); short Italy (EWI)

In continuation of a note published yesterday titled “European Sovereign Debt Concerns Have Not Gone Away: Red Flags from Greece and Portugal”, today the yield on Greece’s 10YR bond hit an all-time high of 12.9%, rising 51bps d/d, and Greece's Athex Composite (equity index) slid -3.8% . As borrowing costs push up following yesterday’s credit downgrade of Greece by Moody’s, investors are rightfully shaking in their boots. 

Today the country auctioned 6-month bills worth €1.625 Billion at a yield of 4.75% versus a previous auction of similar maturity of 4.64% in February. Foreign buyers represented 31% of the auction, in line with the average, and the bid-cover ratio was 3.59.

However, the increase in yield bucks a trend we were seeing in auctions from peripheral countries year-to-date in which yields came in lower than previous auctions, a reflection of confidence in foreign buyers (namely China and Japan) and that the EU’s comprehensive package to bailout the periphery would be favorable to countries like Greece.

That tide however has turned in last days, as uncertainty mounts over the specifics of a bailout package for the region, especially as the all-important German voice has become marginally more assertive on its notion of bailout and crisis management terms. This includes firm opposition to the rescue fund directly purchasing Eurozone member government bonds and a stricter stance on debt and deficit levels and fiscal consolidation mandates.

Now, given Moody’s decision yesterday to downgraded Greece credit rating by three steps on rising default risk (Ba1 to B1), investors are shaking as Greek bond yields rise. 

This month, Greece is bumping up against a hefty €12.41 Billion in Debt maturities (€10.56 Billion in Principal, and €1.85 in Interest), of the some €53.07 Billion due this year. With the country's fiscal state severely imbalanced [the country's debt as a percentage of GDP stands at 144% and its deficit is -15.4% of GDP], we'd expect to see Greek markets underperform as Europe lacks a unified voice on the conditions for a comprehensive bailout package to be decided at the EU Summit on March 24-5. 

Matthew Hedrick

Greek 10YR Hits All-time High! - mh4