As Everyone Is Freaking Out About Ireland, Greek Bonds Are Rallying Hard

The Eurostat has said they could soon revise up the 2009 budget deficit they had reported for Greece according to Reuters. This could even have a small effect on 2010’s expected deficit as well.

Still, while markets and media have been getting pretty worked up about Ireland’s problems, Greek bond yields have actually fallen quite substantially lately, indicating far greater confidence in the nation’s financial situation, even if they’re still high. Greek government bonds are rallying.

As ugly as Greece’s situation remains, the government expects to cut its budget deficit to 7.8% of GDP this year, down from 13.8% in 2009.

Less ugly is all these bonds need since even if Greece were to default, one important thing to remember is that defaults don’t usually end in bonds losing their entire principal. They usually involve an eventual ‘haircut’; a reduction in principle but not a complete wipe-out. Thus at a 10% yield Greek 10-year bonds allow investors to do OK even if they were to experience, say, a 50% haircut in five years.


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