Greece's situation is getting worse

The only reason I cover the problems in Greece is because it is the canary in the coalmine for sovereign defaults. What happens in Greece will likely occur in Spain, Portugal, Ireland, and eventually Italy. So the situation is quite important to follow.

The news today is that large financial institutions (mainly European) are refusing to accept Greece government bonds as collateral for repurchase agreements. If true this is the beginning of the end for Greece as repurchase agreements are one the major sources of funding for the Greek financial system (outside financing by the ECB). Greek banks buy government bonds and can then use the bonds as collateral. But we are now hearing that they will no longer be able to do this if the news reports are correct. This could lead to a liquidity crisis.

So what's causing this situation to rapidly deteriorate? The bond market is calling the EU's bluff and is going to force an official bailout. Greek 10yr bond yield are now trading above 7% which is over 400bps more than the German equivalent bonds. This market action will force the EU/IMF to stop talking and craft a real solution to Greece's problems.

While you would naturally be concerned--US markets are largely ignoring the problem but this could change anytime. If you look at the chart below you will see the daily sentiment index for the Nasdaq--at new highs so market sentiment is extremely high and subject to a reversal. The only positive that I can see is that gold is finally doing what it has historically done--provide safe haven during a currency crisis.

Black Swan Insights


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