What's going on?
Greece is struggling to repay its enormous debt whilst staying in the Euro. To that end, Greek governments agreed to reforms in exchange for financial support. This support came from their European partners: the European Central Bank and the International Monetary Fund (IMF). It is an unchallengeable practise and condition of the IMF to have its loans served before any other creditors. Failure to do so or even casting the shadow of a doubt on that preferential treatment of the IMF, affects the credit worthiness of a nation. This week Greece served an IMF repayment on time, which was questioned by Greek officials. The payment calmed bond investors and Greek bond prices rose while the yields fell.
What does this mean?
Greece proved for one more week, that it can still meet its financial obligations, which made Greek bond prices go up in value. This can change daily as financial support is withheld by the international institutions (EU, ECB and IMF) who have helped before. The mix of unwillingness and illiquidity of the new anti-austerity government in Athens is a red flag for investors. They sold Greek bonds in recent weeks as it seemed more likely that Greece will not repay them. If bonds get sold, their prices fall and if the prices fall, their yields go up – that is a mathematical necessity. High yields are a sign of risk. Greece honoring its IMF obligations was a good sign, hence, bond prices rose and yields fell.
Why should I care?
If you are invested in any asset class in the financial markets, you must care about the Greek drama. What can happen? Let’s say Greece get another life line by the EU, ECB, and IMF. That will help the Euro, it will support equities in Europe and bring bond prices up (and yields down). But much more interesting is the question of Greece defaulting and then leaving the Euro zone – that will put pressure on the Euro, have affect equities (not so much though), but it would have a massive impact on the bonds of other debt-ridden European nations. So, if you believe Greece will make it, maybe buy Greek bonds or the Euro versus the US Dollar. If you think they’ll fail, maybe sell other southern-European bonds or the Euro.
Originally posted as part of the Finimize daily email.
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