Greece Crisis

Is Greece heading for default?
1.1 Greece’s slide into fiscal crisis
Recent weeks have seen mounting concerns among investors about the financial and economic outlook in Greece. These fears have centred on its fiscal position and outlook, which have deteriorated significantly over the past year, to the extent that there are fears of a possible debt default. By the final week of January, Greek 10-year bonds were yielding 6.8%, more than 3.5% above German government debt of the same maturity. This spread between Greek and German 10-year yields has increased from a low of just 0.3% at the beginning of 2008, and now stands at its widest level since 1998 – three years before Greece joined the euro. In part, this spread widening reflects a process of credit differentiation that has gone on across the Euro area during the recession and financial crisis. Government debt yields in other weaker Eurozone members such as Ireland, Spain and Portugal have also risen sharply relative to German debt yields over the last two years. But the spread widening seen in Greek debt over the last few months has been far more dramatic than in these other weaker Eurozone countries. Chart 1: Eurozone credit spreads
Eurozone: Credit spreads
% spread of 10-year bonds over German bunds 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan-2008 Greece Portugal Spain Ireland

Chart 2: Long term Greek bond spread
Greece: Long-term yield spread
% 7 6 5 4 3 2 1 0 -1 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source : Oxford Economics/Haver Analytics

Spread of Greek 10-yr yields over German yields

Jul-2008

Jan-2009

Jul-2009

Jan-2010

Source : Oxford Economics/Haver Analytics

The key factor underlying the abrupt sell-off in Greek government bonds has been a disturbing deterioration in the country’s fiscal position. In October 2009, the new socialist government revised up the estimate for the 2009 budget deficit from 6.7% of GDP to 12.7% of GDP. This move shocked... [continues]

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