Below we’ve charted the CDS (Credit Default Swap) spread on Greek 5-year government bonds, which begs the question . . . are things getting worse in Greece? CDS spreads for Greek government debt have blown out to levels not seen since February, when sovereign debt defaults concerns were most vocal. While the market and headlines are now focused on Goldman Sachs and the financial sector, Greek CDS spreads are signaling ongoing sovereign debt issues. And as we stated on our Sovereign Debt Call last month, history tells us that Greece is typically a leading and not lagging indicator.
The Ecofin Summit from April 16-17 of Eurozone finance ministers and central bankers in Madrid ended without substantial agreements on problems facing the European economy as a result of the Greek debt crisis. While partially to blame was the distraction from the Icelandic volcano, the reality is that no real resolutions were reached regarding Greece. While the Greek Prime Minister’s austerity measures appear aggressive, including a 10 percent cut in social spending, a two-year increase in the retirement age, and the elimination of public sector jobs and two months of wages for public service workers, the market is signaling, as outlined in the chart below, that they are not enough.
Greek has to borrow an estimated 12BN Euros in March and 32.5BN in Euros through the duration of the year. Two years ago Greece was borrowing at ~4.5%, versus its current market rate of 7.37%. The dramatically increased interest rate is obviously offsetting much of the gains expected from the austerity measures.
We highlighted sovereign debt issues as a key reason to be negative on equities heading into May, and will be keeping CDS spreads for Greece and its PIIGish brethren front and center.
Daryl G. Jones