The remarkable success of Greece’s latest bond issue has been remarkably short-lived, and today’s developments confirm that the eurozone’s fiscal problems will continue to flash red on the markets’ radar screen: fiscal positions are precarious in a number of countries, the government’s response is too often hesitant and timid, and the lack of effective mechanisms to enforce fiscal discipline is exacerbating tensions between fiscal “hawks” and “doves”. These political and market tensions will be with us for a while as markets decide how to re-price different macro and fiscal fundamentals. Portugal’s 2010 budget plan disappointed, while the European Commission presses on with its excessive deficit procedure against Greece. Press reports that Greece might have approached China for a EUR25bn bond sales, quickly denied by the Greek Finance Ministry, cast some doubts on whether the strong investor demand at Monday’s syndicated issue can be expected to last.
Volatility on sovereign spreads is likely to remain high in the coming weeks. Greece should take more decisive steps to win back investor confidence in a more durable way—a rapid widening in spreads at the pace seen today could quickly push us to a digital situation were confidence does need to be recovered without delay. But if outside help is needed, it would be especially disappointing if faced with the “closed wallets” of its EU partners, Greece had to turn to the deep pockets of China.
