I finished writing a short piece yesterday on Greece running out of time and then looked at Drudge Report and saw a couple of stories on Greece.
In particular, shares in Greek banks are hitting all-time lows and the rumors are picking up that the European Union may let Greece sink. Perhaps they are finally going to stop throwing away good money.
I checked the 10-year yield for Greek government bonds and, as of this writing, the yield is over 13%. It is about double what it was a year ago.
Interest rates had spiked back in 2011 and 2012 to really high levels (above 30%) with fear of a default. Then Germany and the rest of the EU came to the rescue and bailed out the Greek government. Things calmed down and interest rates went back down.
Germany’s 10-year yield is nearing zero and Switzerland’s 10-year yield is in negative territory. Even Italy and Spain have low yields.
Since Greece is still tied to the euro, at least for now, we can assume the high interest rates are not an inflation premium. Instead, they are a default premium. The market sees virtually no risk of default for German bonds. But the risk premium for Greek debt is going higher quickly, as it should.
We may see the Greek 10-year yield spike even more over the coming days as more people anticipate a default. I’m guessing no readers here are invested in Greek debt (hopefully), but it is still an interesting story to watch.
When the EU finally quits bailing out Greece and Greece leaves the EU, it will be interesting to see the ramifications. Will other countries follow close behind? Will the euro strengthen or weaken? What will Greece look like and will it see some kind of hyperinflation eventually with its own currency?
As shaky as the American economy is, Americans should be thankful to not live in Western Europe or Japan. The U.S. is still far less of a welfare state than most other places in the world.