For many seasoned market observers, Greece's debt crisis - and the accompanying market turmoil and fears of a viral spread - has a familiar ring to it. Last time we saw these sorts of global sovereign dominos lined up for a fall, we even had a catchy, rhyming name for it.
Asian Contagion.
By the fall of 1998, a real-estate-fuelled debt crisis had already crippled Asia's currencies and brought several countries to their financial knees. Talk that the problem could be largely contained in Asia was being displaced by a darkening dread that it would cripple the entire global debt market. The heightened fear permeated the North American bond market, where corporate spreads and bond volatility spiked dangerously.
Does any of this sound familiar?
As the crisis in Europe progresses, we are, indeed, feeling increasing shock waves with each shift in the Greek landscape. The recent wild gyrations in stock markets were evidence that global contagion fears are growing.
But there's big difference between 2010 and 1998, and it lies in the bond market's reaction. Or, rather, lack of reaction.
NOT CATCHING THE GREEK COLD "Contrary to what happened during the 1998 Asian crisis, foreign sovereign fears have not spread to North American bonds," wrote Pierre Lapointe, global macro strategist at Brockhouse Cooper in Montreal.
While U.S. stock-market volatility measures spiked to their highest levels in more than a year last week, U.S. bond-market volatility remained relatively tame. The Merrill Lynch MOVE Index (a measure of implied volatility of one-month Treasury bills) did jump, but it remained at fairly normal pre-recession levels - nothing like the spikes seen in the fall of 1998, or even the fall of 2008.
THIS IS NOT YOUR 1998 PANIC Mr. Lapointe argued that the nature of the current crisis, versus the one in 1998, could explain why bond markets don't fear the same spread of financial contagion that they did in the Asian crisis.
"While we understand that many investors might be tempted to draw similarities with the Asian crisis, we note that the differences are too important to ignore," he wrote. "Firstly, European countries have problematic public debt in their own currency. Asian countries had problems with private debt in foreign currency. Secondly, the EU and the IMF intervened quickly last week to allow Greece to meet its financial obligations for the next three years, and consequently prevent default. In 1998, the crisis spread to Russia and ultimately caused the country to default."
However, it's worth noting that by the time North American bond markets hit the panic button on the Asian crisis, the tumbling of that region's dominos had already been going on for more than a year. If Greece turns out to be just the first in a line of troubled European economies to hit the debt wall - as many people fear - it may be too soon to declare that debt markets on this side of the pond will escape the pain.
David Parkinson