April 21, 2011
With Greek 2-yr debt trading at a yield of 22%, and spreads to Germany at record highs, the question the market is grappling with is not whether Greece will default, but by how much. As the chart below shows (HT: Zero Hedge), long-dated Greek bonds are now selling for 50-60 cents on the dollar, suggesting the market is expecting a default/restructuring that effectively reduces the amount Greece owes by almost half. We've seen massive restructurings like this before (Argentina comes to mind) but despite the magnitudes involved, life goes on. When debt is wiped out or cut in half, lenders lose but borrowers gain, in a sense. It's a wealth transfer, but it doesn't necessarily reduce the world's output, which is what provides the foundation for all wealth and all cash flows. And not surprisingly, therefore, despite the near-certainty of a massive Greek restructuring, global stock markets remain very close to their recent highs, and swap spreads in the U.S. and Eurozone remain relatively low.