The Greek crisis could be the beginning of a far bigger systemic meltdown. Greece has to pay a crippling price for the credit it needs to fund its sovereign debt. That's if it can find a market for the bonds it needs to sell to meet its commitments. Investors are demanding a yield of as much as 7.25% to buy Greek 10-year bonds, more than four percentage points higher than yield on German bonds and way above US Treasuries. The worry is that Greece is part of a phenomonen that will destroy the financial books of many other countries. They are all linked because it requires a bailout, creating a daisy chain that could have disastrous consequences all around.
Writing in the Financial Times, Mohamed El-Erian, co-chief investment officer at PIMCO says Greece's problems are going to get a lot worse before they get better.
As the BBC reports an International Monetary Fund team is in Greece now trying to manage Greece's finances but you can bet they will have to tip in money. Greece is paying that 7% on 10 year borrowings of 20bn euros ($26.7bn; £17.5bn) of debt due for repayment over the next two months, as opposed to Germany which pays just 3%. Borrowing at such a high rate increases the risk of a default because it stretches the country's public finances to breaking point. As a result, the Euro has gone into freefall as investors fear this is just the beginning of a Eurozone meltdown.
El-Erian writes that everyone knows the problem is going to get worse, which is why everyone is terrified of making a move. As soon as they do, they will be exposed. Germany, wants any deal done on commercial rates, in contrast to other member states which are willing to offer help below market levels.
He writes: "It is a classic co-ordination failure in game theory. Any first mover will become worse off. Indeed, it is in the interest of any single party to wait for others to move first. As a result, no meaningful progress is made, the problems fester, and the risks of a disorderly outcome increase. Buoyed by a cyclical recovery, markets around the world have yet to recognise the complexity of this situation. When they do, it will also become apparent that Greece is part of a wider, and historically unfamiliar phenomenon – that of a simultaneous and large disruption to the balance sheet of many industrial countries. Tighten your seat belts."
In other words, Greece could be just the beginning.
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