The yields on Greek government debt fell last week, with the yield on the country’s benchmark five-year government bond briefly falling below that of its Italian counterpart for the first time since 2008. The decline since the start of the year is remarkable, with Datastream data showing that the yield dipped below 2% for the first time since the series started in 1997.
Greek equities also surged on the news ― at the time of writing, total returns were up by roughly one-third since the start of the year. Indeed, the ATHEX’s surge means that the year-to-date performance of Greece’s main equity index is now significantly ahead of other benchmark indices.
The rally in both equities and bond prices was spurred by the news that early elections will take place in July of this year, with the centre-right New Democracy party currently ahead of the incumbent, Syriza, according to official polls.
Despite this, investors still see Greek debt as a highly risky prospect ― according to Fathom’s proprietary probability of default indicator, market pricing is still consistent with a one-in-four chance of sovereign default within the next five years.
However, this looks increasingly at odds with reality; while an elevated debt burden remains worrisome in the long term, years of austerity have enabled the government to turn a sizeable fiscal deficit into a modest budget surplus, greatly reducing the chance of default in the near term. Added to this, a large proportion of Greek debt is now owed to official institutions (typically at long maturities). Indeed, despite Greece having a much larger debt ratio than Italy, interest payments represent a broadly similar drag on both countries’ budgets.
Despite investor bearishness on the odds of a Greek default, there are now few signs of concern over Grexit ― according to Fathom’s calculations, the market-implied likelihood of this happening within five years was roughly 2% at the end of May.
The charts in this article have been created using Chartbook on Datastream. The Chartbook was initially created by Fathom Consulting in 2012 and is now a catalogue of approximately 9000 charts, covering over 170 countries, analysing up-to-date macro and financial data. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. The Composite FVI, comprised of readings from all four underlying FVIs, is available for 176 countries in the Fathom Proprietary Indices section of Chartbook. To access Chartbook via Datastream search ‘cbook’.
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