Gambling with parliament.

Photographer: Angelos Tzortzinis/AFP/Getty Images

Greece's Growing Threat to the Euro Project

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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The complicated and unstable politics of Greece have come down to a new moment of truth: On Monday, Prime Minister Antonis Samaras called for a snap presidential vote in parliament, gambling that he can persuade legislators to back his candidate. If he fails, however, it will trigger elections that could cost Samaras his job. Amid the ensuing market turmoil, one geeky move in the bond market suggests the smart money is seriously worried that Samaras's gambit will backfire.

Yesterday, Greece's three-year yield popped above the 10-year benchmark. That's a strong signal that the bond vigilantes are way more fearful about Greece's immediate prospects than they are about its longer-term creditworthiness:

The return that investors demand for lending money to a government or company typically increases in step with the length of the loan. That's because risk is greater in the long term, as contingencies like the borrower's creditworthiness or alternative investments are subject to bigger fluctuations.

Common Currency in Crisis

In the U.S. government bond market, for example, Uncle Sam pays a bit more than 1 percent to borrow for three years, rising to 2.2 percent for a loan repayable in a decade. So the Greek bond market is an anomaly that's worth keeping an eye on.

If Samaras can't get the Greek parliament to back him, elections could usher in the opposition Syriza party, which leads Samaras's New Democracy party in the opinion polls. Syriza leader Alexis Tsipras wants to roll back the nation's economic austerity programs, which could trigger a fight with Europe over Greece's bailout program. That in turn could lead to Greece defaulting on its debts, and investors are obviously concerned this might happen: Just look at the soaring cost of insuring against nonpayment using credit-default swaps in the derivatives market:

Since Samaras announced his gamble, the three-year Greek yield has jumped by more than 3 percentage points, outpacing the 1.5 point climb in 10-year borrowing costs. The shift in Greek bonds -- the technical term is an inversion -- is a warning sign that the country that started the euro crisis by lying about its budget deficit may threaten the common currency all over again. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net