Greece Update

Currency in Crisis

Greek 2-year and 10-year bonds are holding in fine today, with the spread against Germany narrowing around 5 bp today. Pressure has intensified in recent days as European support seems half-hearted. Some officials have criticized Greece for relying on one-off measures to cut 10 bln euros from this year's budget, and suggesting that Greece may need to take additional steps.

Greece appears to be making a subtle but important concession today. It will invite a Eurostat member to serve on its statistics agency. While the lack of fiscal prudence in good economic times is the underlying problem, Greece's faulty and compromised data collection is an obstacle to policy and undermines its credibility. It is possible that greater auditing power is given to Eurostat.

While Greece is acting as a lightening rod for the region, note that the pressure within the euro zone has increased. Over the past five sessions, while Greek 10-year yields have risen 27 bp, Portugal's yield has risen 21 bp. But it is not just the periphery of the euro zone. Note that Belgium's 10-year yield has risen by 22 bp.

In addition, the pressure is not only in the long-dated debt obligations, but the shorter maturities are also getting hit. Even though Greek 2 year yields are off 3 bp today, over the past five sessions, they have risen 73 bp. The second largest rise is not Portugal (+8 bp), Italy (+1 bp), Ireland (-5 bp), but Belgium where the two year yield has risen 26 bp.

Elsewhere, some media reports have played up a report by the legal counsel to the ECB: Withdrawal and Expulsion from the EU and EMU. The conclusion of the paper that is that unilateral secession from EMU conceivable, but there would likely be serious objections. Moreover, withdrawal from EMU would necessitate withdrawal from the EU as well. It does allow for a negotiated withdrawal, which it suggests is possible. On the issue of forcible expulsion, the paper was clear that there is no clear mechanism for this. While some reports make it seem that the mere discussion of the possibilities make it more likely, the conclusion of the report seems to point in the other direction.