This should be another interesting week for Europe. On Friday, the
euro fell to its lowest level in 18 months, world stock markets took a hit,
and there has reportedly
been a big sell-off in European periphery zone debt by large investors,
with ECB doing the buying (as announced as part of the bailout plan). According to sources quoted in the FT,
Pimco has sold all of its holdings in Greek and Portuguese sovereign debt. It also quotes an unnamed “head of one
of the largest US asset managers” as saying “We think it is too risky to buy
Greece and Portugal. The chance of
restructuring is too high.”
Ramin Toloui, a senior portfolio manager at Pimco, is also
quoted:
The European Central Bank’s decision to buy government debt
could be backfiring. Instead of encouraging private investors to keep their
government debt, the programme might be leading to more sales, he said.
“The risk is that investors are using the ECB as a vehicle to
exit their positions,” he said.
Now, maybe I’m dense, but I guess I don’t understand why
this is an unanticipated result. Though
Gelpern
doesn’t foresee a Greek restructuring in the near future, many
others do (John Dizard reports in his column yesterday that "most of the lawyers, bankers, and emerging market investors" predict a restructuring within six months to a year). And, given
the uncertainties associated with the “shock and awe” plan for the long term, surely
dumping Greek and Portuguese debt onto a willing ECB buyer if given a chance is
an attractive opportunity for some savvy investors unwilling to hold an asset
much riskier than the reasonably safe European debt they originally bargained
for?
Barry
Eichengreen also comments on the “unprecedented purchases of Spanish,
Portuguese, Greek, and Irish bonds by the European Central Bank,” noting:
rather than folding their cards, European leaders doubled
down. They understand that their gamble will be immensely costly if it proves
wrong. They understand that their political careers now ride on their massive
bet. But they also understand that they already have too many chips in the pot
to fold.
It’d be interesting to know exactly who was selling European
periphery sovereign debt (other than Pimco) last week, and whether there were
buyers other than the ECB. And how
long does ECB plan to buy and what will happen when they decide it’s time to stop? A trillion could go pretty quickly
under such conditions, it seems.
Related
Posts:
Don't
Let An International Crisis Go To Waste
Γκελπερν v. Gelpern: Unformidable Opponent,
Greek Edition
Should Greece Restructure? The Debate
Continues
Buchheit and Gulati on How To Restructure
Greek Debt
When Will Greece Restructure?
Greece Gets Bailout: Are We Done Now?
The Greek Bailout: War Versus Dishonor
What Do Those Greek Debt Contracts Say?
Greece: Argentina, Uruguay, or Twin Engine
Plane?
Blame It On Derivatives, Blame it On Goldman
Sachs, Blame It On the Nazis. But Don’t Blame the Greek Crisis on Greece
The Greek Crisis: Economic Meltdown or Mental
One?
The Modern Greek Drama: Comedy, Tragedy, or
Both?
The Modern Greek Drama, Part 2
Verge of the Unböring (The Modern Greek
Drama, Part 3)
Is 2010 The Year of Odious Sovereign
Defaults?