Well, we now know what these things were being priced at. Bloomberg mentioned strong demand. Well, there should’ve been strong demand given the pricing:
Today’s debt sale is being offered at a spread of 300 basis points more than the mid-swap rate, or a yield of approximately 6.37 percent.
Let me now show you where those 10 yr Greek govies closed the day before the sale, 3/3/10:
The red bar is at the 6.37 – 6.40 range, so you can see the new debt had a pretty steep discount to the existing issue. Here’s the chart on the Euro:
The Euro got a bounce from the auction, which was expected. Some of the fear factor has been taken out of the trade. But I’d be using this opportunity as a chance to lighten exposure here if I had it. Greece still has another $20bn to roll over the next several months, so there’s plenty more debt drama ahead for them – and us. But as the chart shows, the channel lower is still firmly intact on the daily chart.
But Greece is just one country that needs to roll debt. Spain was in the market doing the same, pricing a €4.5bn issue of 5yr bonds at a 75bp spread. And with other countries like Portugal and Belgium on deck to issue more debt later this year, plus France’s credit risk being priced higher, it doesn’t bode well for the currency just from that perspective alone. Rolling debt to pay for engorged entitlement programs is not the way to build up productivity in one’s economy. Especially since the populations are getting older and want to retire earlier. Funny thing is, the world’s economies will need to rely more on older workers, especially in Europe.
Taken altogether, what do you get? In my mind it’s a currency that’s getting weaker. The Euro has been overvalued relative to the dollar for a while now, so this is part of a readjustment between the two, with dollar strength against Euro weakness. The weakness will happen through defaults, austerity, and lower productivity (as if European countries outside of Germany were that productive to begin with).
Is that a positive for the continent? Sure, for Germany it is. Because the world likes German manufactured products. Can’t say it will help the other European countries as much because their exports tend to be more agricultural (think of food items sourced from those countries and their popularity) and when you talk ag products, you’re talking about heavily subsidized farming in most countries and tariffs and barriers to entry in markets. So the competitive advantage is not there. The idea of Pareto efficiency seems to be at work here in a big way. The distribution of winners and losers in a Euro devaluation and export boom will not be symmetric or equitable. Some countries on the continent will come out much better than others.
Which would lead to Germany gaining even more influence over the European continent than it has now.
And depending on who you talk to, that may not be so great…