Greek debt lesson

The next best thing in continuing economics education, besides going to school, is following the markets.  The financial markets are perhaps one of the best places and cheapest ways to getting a first-class education.  I am referring to the everyday news, analysis, and commentary that is published around the world from people who are trying to make money or people who like to think that they are helping others do the same.  Since people follow each other in masses, sometimes it even seems that the course material follows an organized lesson plan.  What is the latest lesson?  Reduce your budget deficits are else your country will go broke.  Guess who is today’s trouble child? The student who will get the next F?  That’s right, Greece.  Who is the straight A student (triple A to be exact)?  The United States?  Maybe in the short-term, but in the longer term most of the class might fail.  Just take a look at some of the budget deficits that are out there (U.S is not an exception).

But of course, to get the most out of this education, we must know how to read into the stories that reach our screens and get to the bottom line of what is happening in the marketplace.

The public debt markets have caused panic.  This time, the stock market isn’t the main culprit.  When Greece had problems in covering its bond issuance, an alarm was sent to the rest of the world. The fact is that Greece has a large budget deficit and investors fear that the country might become insolvent.  The yield for Greek bonds and the spreads on sovereign debt CDS jumped higher.  The problem started there but given that we all run on our human emotions, fear was compounded exponentially and the main topic covering the news waves was that fiscal deficits must be controlled immediately.  All of a sudden, other countries were facing the same predicament, credit ratings were threatened, and even the integrity and unity of the European Union was threatened.

What is the bottom line that I am getting from all of this?  Well, the answer that I find, the true bottom line that I could gather is that the markets are signaling inflation.  Most likely, the debt markets have ran their course; they have provided all the liquidity that they can, and most likely, the market is starting to become flooded.  That is the signal that the Greek debt market has provided us!  Why Greece?  Well, it is obvious that pressure will begin at the weak spots.  The fiscal deficit is a true concern.  For Greece, the deficit is a large proportion of its GDP but the European Union requires it to fall to 3%.  Savvy investors now this and when it came time for Greece to issue their bonds, only a significant spike to yields would allow it to find enough buyers to cover its issuance.  It started with Greece but only because countries compete against each other in the bond market.  The “fiscal spending cuts” part of this cycle/crisis has arrived.  My conclusion: Bond yields will rise globally!

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