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Bonds: Greece is the word, yet again...

Date: Monday 06 Feb 2012

Bonds: Greece is the word, yet again...

These were the movements on the 10 year bonds of some of the most watched countries through Monday:

Italy 5.62% (-8bp)
Spain 5.02% (+3bp)
France 2.88% (-2bp)
UK 2.16% (-2bp)
Germany 1.85% (-5bp)
US 1.91% (-2bp)
Greece: 34.24% (+5bp)

It’s all about Greece. The 24 month saga that has seen riots on the streets of Athens and threatened the survival of the euro currency now appears to be reaching an endgame, of sorts.

The International Monetary Fund, the EU Commission and the European Central Bank have demanded Greece makes a further 1.5% of GDP cut in government spending but with a proviso that the cuts receive support from across the political spectrum. And there’s the rub, because Greek politicians have failed singularly to agree on anything since the start of the crisis.

It was this lack of cohesion which saw the previous Prime Minister, Georges Papandreou, suggest a referendum on membership of the Eurozone back in the Autumn of last year. He was sick and tired of being brow-beaten by his European colleagues to make cuts then facing howls of derision back home.

Now the Europeans are realising just how difficult his job was, as a meeting in Athens on Monday, intended to sign off the new cuts, had to be rescheduled because agreement couldn’t be reached on cutting the national minimum wage.

Things are now so bad both Angela Merkel and Nicolas Sarkozy have indicated the deadline for agreement has passed.

If an agreement isn’t reached soon, Greece will not get a further €130bn in bailout money. That would mean the country would default on a bond maturity at the end of March, leaving Europe, and the global economy, in uncharted waters.

You won’t be surprised to learn the yield on Greek 10 year bonds has risen by 5 basis points today, although given that the interest rate is currently north of 34%, it’s fair to say there are bigger concerns for Eurozone governments.

German bonds, which are already scraping historic lows, dropped a further 5 basis points as investors decided safety was best (after a recent run of “risk on” days).

The general sense, though, is of investors and the political elite of Europe waiting, in the stillness before the storm, to see whether Greece can suck up yet more economic pain, or whether it gives up the ghost completely and pushes the global economy into the abyss.

BS

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