Friday, September 2, 2011

UPDATE: Greek Debt Yields Blow Out

Almost 18 months ago, I warned of a coming debt crisis in Greece. At that point, Greek debt yields reached 14 percent--meaning that Greece had to pay a lot of extra interest to entice investors to purchase its debt. As a comparison, the US two year debt now yields 0.19.

Well, today yields on Greek debt really blew out--one year Greek bonds now yield 68 percent, and the two year is nearing 50 percent--quadrupling over the last year, as shown at right. These yields reflect the fact that the market now assumes the risk of some form of default on Greek sovereign debt.

While Greek adoption of the IMF's and Eurozone's austerity prescription averted a financial cataclysm in 2010, it backfired in 2011, causing a deeper recession, a widening Greek deficit and therefore a worsening not an improvement of the Greek debt crisis. The GOP Arson Squad should take note: the Greek experiment shows that austerity will only worsen a recession induced deficit. The only way to resolve a debt crisis is rapid growth in productive government investment, as I have argued since December of 2008. It is becoming increasingly unclear whether Greece will see further bail outs from the Eurozone.

The failure of austerity in Greece, seems destined to wreck havoc across global financial markets and exacerbate the US stagnation/recession, as well as threaten a wider conflagration in Italy and Spain. Indeed, combined with other issues threatening US bank capital, these Eurozone issues caused credit default swaps to increase yet again for the US financial sector evincing enhanced risk aversion here in the US.

The situation in Greece suggests a grimmer outlook for the global economy which necessarily means a grimmer outlook for the US.


  1. Doesn't the 68 1-year/50 2-year scheme imply that the market expects that Greece won't default, or at least that its less likely? That is, holder's of longer-term debt expect yields to be lower in the future, and thus less risky, and want to get in on the action at a good price before the anticipated drop occurs?

  2. "The GOPArson Squad should take note: the Greek experiment shows that austerity will only worsen a recession induced deficit."

    Ah, yes, those foolish Greeks and their European masters. Don't they know that the only way out of a debt crisis is to increase government borrowing and spending? I mean, it's worked so well here. And we have the trillions of dollars in new debt and the job growth to prove it. What we really need is for the federal goverment to create some more of those sustainable "green jobs" at approximately $500,000.00 a piece. You are a genius.

  3. You are an ideologue and your discredited ideology will lead us to a global depression. Try thinking instead of reverting to obsolete doctrines of defunct economists.

  4. Like most leftists, your definition of an ideologue is someone who holds to their opinion after you've stated yours. It's interesting to watch you and your leftist brethren, obviously bankrupt of ideas, reduced to smears and the whining, infantile assignment of blame. Time to step asside and let the grown-ups get on with the job of fixing the economy.

  5. Yes, like in 2000-2008, when you turned massive surpluses into runaway deficits with your reckless tax cuts, crashed global capitalism by dismantling government, lost millions of jobs and got us into two aimless wars (at least Obama got the bad guy unlike the keystone cops before him).