The risk associated with governments piling on debt is not a new theme for us, however yesterday’s move by Fitch to reduce the Greek sovereign rate from A- to BBB+ was front page news. The chart below shows the yield on the 10-Y Greek Bond versus the perceived credit worthiness of the 10-Y German Bund. Clearly investors will expect a significant risk premium to own Greek debt on the longer end of the curve, which should continue to push up yields even if the Greek Finance Minister George Papaconstantinou said that there is “absolutely” no risk the country will default on its debt or seek an EU bailout.
With Greece pushing a government deficit of 12.7% of GDP this year (the EU mandates under 3%) and Greek banks facing more difficulty raising funds with a deteriorated credit rating, the government must bite the bullet and administer aggressive spending cuts.
We’ll have our eye on potential ripple effects throughout the region. Just over the last 4 weeks we’ve seen yields on 10-year bonds from such countries as Ireland, Hungary, and Portugal blow out, while Germany and France have held steady and even come in.
The Greek god responsible for earthquakes, Poseidon, is making financial tremors that are being felt in sovereign markets around the global.