Greece Still Needs Intensive Care

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Being hooked up to beeping machines in hospital is no fun, so it's understandable Greece wants to discharge itself from the supervision that came with a 240 billion euros ($307 billion) transfusion of emergency aid in 2010. The bond market, however, is saying Greece still needs intensive care.

Greece's 10-year yield has surged to 9 percent from 6.5 percent this week. While the scale of the move partly reflects current market turmoil, the direction of travel was established before global stocks decided to head south for the winter:


As a condition of Greece's rescue, the country has had to submit to regular examinations by the so-called Troika -- the European Central Bank, the International Monetary Fund and the European Commission -- which then prescribes various economic medicines, mostly in the form of financial dieting pills. Prime Minister Antonis Samaras, starry-eyed after his 10-year borrowing cost dipped as low as 5.56 percent at the beginning of September, said last week he'd like his freedom back.

Enter the bond vigilantes. By driving Greek yields up, investors collectively expressed their view that Greece isn't ready to finance itself without support from those international agencies. A deteriorating economic backdrop in the euro zone, ECB stress tests for banks that may highlight the persistent capital weakness of Greek lenders, plus the prospect of parliamentary elections early next year are all reasons to shun the nation's bonds.

It doesn't help that the country's opposition Syriza party, which wants to reverse many of the post-crisis economic reforms and renege on the nation's debt obligations by writing down their value, is leading in opinion polls.

Back in April, Greece made its first foray into the international capital markets since its debt restructuring in 2012. The government borrowed 3 billion euros in a sale that was so oversubscribed investors were willing to lend more than 20 billion euros, and the yield dropped to 4.95 percent from the 5.25 percent first indicated. Investors paid a bit more than 99 cents for the five-year securities; today, they'd fetch about 91.3 cents.

Put another way, investors were willing to lend five-year money in April provided Greece paid about 4.4 percent more than Germany; today, they'd demand a yield premium of about 7 percent.

Financing yourself when investors are offering money for a decade at 6 percent or less is one thing; trying to pull that off when your borrowing cost is 9 percent is unsustainable. Greece needs to pay attention to the bond vigilantes and, no matter how frustrating, stay on its meds.

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