In any crisis, there is an opportunity to make a killing. But that opportunity is exceedingly hard to spot in the Greek debt crisis -- there are just too many moving parts. That might make it the ideal situation for game theory geeks. For everyone else, it’s outright scary, which explains the head-for-the-hills selling pressure on Thursday.
The Greek economy, government, society and finances are unraveling so quickly that it’s hard to make sense of what’s happening. On Wednesday alone, Athens was paralyzed by strikes and protests that turned violent. That night, prime minister George Papandreou announced that he would shuffle his cabinet, form a new government and demand a vote of confidence (likely on Sunday).
Since then, several members of his governing PASOK party have resigned and there is talk of a snap election, one that may send Mr. Papandreou into the political wilderness just when Greece needs political turmoil least.
While Athens burns, the European Union, the International Monetary Fund and the European Central Bank are engaged in open warfare over Greece’s fresh bailout loans. When should they come? How much is needed? Should they require private bondholders to take losses? Germany says yes to the latter; the ECB says no.
As they prove to the global market that there is actually no coherent plan to spare Greece, and perhaps the rest of the euro zone, from oblivion, Greek bond yields have gone through the roof, taking the yields of other clapped-out euro zone economies with them.
The euro zone debt crisis was supposed to be isolated within Greece, Ireland and Portugal, the three countries that sued for EU and IMF bailouts when they got shut out of the commercial debt markets.
As the true horror of the galloping Greek crisis hits traders and strategists, the inevitable comparisons to the 2008 financial crisis are being made. Greek bonds are the new subprime loans; a Greek default would be a Lehman Brothers-style event. And for fans of Vietnam war films, Acropolis Now.
The market numbers reflect the anxiety and fear.
The FSTE-100 index was down 1.7 per cent in mid-afternoon London trading. The euro has lost two per cent against the dollar in the last two days. Credit default swaps indicate a 78 per cent of a Greek default. The big European banks, the ones with billions of euros of exposure to the Greek economy and Greek banks, are under pressure (on Wedneday, Moody’s said it may downgrade BNP Paribas and two other French banking heavyweights because of their Greek exposure).
The yield on two-year Greek bonds rose to a record 28.85 per cent and 10-year bonds went to 17.86 per cent. The cost of insuring Greek debt against default is at an all-time high.
And so on.
Not to be out done in the agitation sweepstakes, the Irish government is now talking giving “haircuts” to the holders of Irish bank bonds. It’s not just going to be a long, hot summer. It’s going to be a long, hot couple of days as the Greek crisis lives up to its billing.