Bond markets are exaggerating the risk of a Greek default, with historical data showing that widening bond spreads led to a debt restructuring in only 20 percent of cases, according to Morgan Stanley’s chief European economist Elga Bartsch.
“We know from the history of emerging-market crises that bond markets tend to overestimate by a very considerable margin the risk of sovereign defaults,” Bartsch told a conference in Athens today.
“If we look at all the cases in the last 20 years or so when the bond spreads widened to more than 1,000 basis points, i.e. the bond market clearly being worried about a restructuring in the future, you will find that in 20 percent of cases there was a debt restructuring subsequently,” she said. “So in 80 percent of cases the markets got it wrong.”
Bartsch described recent events as the “unruly teenage years of a currency that has just turned 12.”
The extra yield investors demand to hold 10-year Greek debt instead of benchmark German bunds was at 875 basis points today, down from a record 973 in May when Greece was granted a three-year aid package of 110 billion euros ($146 billion) from the European Union and International Monetary Fund.