Greece returns to market

Greece's bond sale was heavily oversubscribed. Is this the end of the eurozone crisis?

Last week, Greece returned to the bond markets amid applause. Two years ago, the country that sparked the eurozone crisis beat Argentina to take the top spot as the world's biggest debt restructuring in modern times.

Yet, demand was such the bond offer was seven times oversubscribed that it managed to borrow €3bn over five years at a yield of 4.95%. That's a far cry from the 30%-plus yield seen on its ten-year bonds in the depths of the crisis (see chart below).

Does it mark the end of the eurozone crisis? Hardly. European Central Bank (ECB) head Mario Draghi spent the weekend talking down' the euro with the threat of some form of quantitative easing (QE).

"The strengthening of the exchange rate requires further monetary stimulus," said the ECB boss at meetings with the World Bank and the International Monetary Fund in Washington. The euro has risen by around 6% against the US dollar this year.

A strong currency is deflationary (it makes imports cheaper and hurts exporters). With inflation low or negative across the eurozone, some fear that Europe will turn into Japan.

687-Greek-10-bonds

The market will need to see action for the euro to weaken substantially". Jens Weidmann, the head of the German central bank, has backed negative rates rather than QE, but is unlikely to back action until the ECB issues a fresh inflation forecast in June.

A strong currency only means more pain for Greece, whose "long-term solvency remains far from certain", says Wolfgang Mnchau in the FT. Yet ironically, now could be the perfect time for Greece to default. It has a budget surplus before interest payments so it wouldn't needto borrow to cover its living expenses.

If that debt were forgiven, or defaulted on, Greece could leave the euro and establish a new, weaker currency.The scenario would initially "freak" investors but they would soon get over it.

A reformed Greece, capable of growth, would be attractive to foreign investors in the real' economy as well, not just to financial investors like the ones who bought its bonds last week.

Recommended

The charts that matter: China upsets cryptocurrency markets
Global Economy

The charts that matter: China upsets cryptocurrency markets

Bitcoin slid again this week after China declared all cryptocurrency transactions illegal. Here’s what’s happened to the charts that matter most to th…
25 Sep 2021
The US Federal Reserve is about to rein in its money-printing – what does that mean for markets?
US Economy

The US Federal Reserve is about to rein in its money-printing – what does that mean for markets?

America’s central bank is talking surprisingly tough about tightening monetary policy. And it’s not the only one. John Stepek looks at what it all mea…
23 Sep 2021
The end of the bond bull market, and how to invest for it
Investment strategy

The end of the bond bull market, and how to invest for it

The great bond bull market looks to be over, and you probably don’t want to be holding government bonds, says Merryn Somerset Webb. Here’s what you sh…
21 Sep 2021
Warsaw and Stockholm: the unexpected new threats to the City of London
UK stockmarkets

Warsaw and Stockholm: the unexpected new threats to the City of London

London has seen off challenges from Frankfurt and Paris, but two other booming financial centres are a bigger threat, says Matthew Lynn.
19 Sep 2021

Most Popular

A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021