Interest Rates on Greek Bonds

The interest rate on the two-year government bond for Greece has gone above 50%, as of this writing.  The rate on the one-year Greek bond is over 88%, as of this writing.  This is incredible.  This means that investors think a default is coming.

Usually interest rates are higher for the longer-term bonds.  When interest rates are higher for the shorter-term bonds, this is an inverted yield curve, which can often indicate a recession is coming.

In the case of Greece's bonds, these rates are indicating an imminent default.  A lower rate for a two-year bond versus a one-year bond (at these levels) indicates that the probability of default is the highest within the next year.  With an interest rate of 88%, investors are counting on a default.  If I thought there was "only" a 10% chance of default, I would gladly drop some money down on a bond paying 88% interest.  But obviously with a rate like that, investors are betting there is a high chance of default and that, if it does come, it will be coming shortly.

While Greece does not have an overall rich population as compared to the United States, it is not a third-world country either.  This coming default (unless there is a major bailout) is significant.  And what makes this even more significant is that Greece has been a precursor for the other PIIGS (Portugal, Ireland, Italy, Greece, Spain).  If Italy and Spain end up anywhere near as bad as Greece, then there will be big ramifications.

The problem here is that a lot of this debt is owned by other countries and banks in other countries.  The banks in Europe have a lot of power, just as they do in the U.S. (which we saw with the bailouts in 2008).

From a libertarian standpoint, Greece should default.  There should be no bailouts.  Some complain that Greece would no longer be able to get loans, as if loaning out money at 88% interest is a good deal.  But really, that is the whole point.  If the Greek government can no longer borrow any money, it will either have to abandon the euro and print money like crazy or else it will have to dramatically cut its welfare state.  Hopefully it will choose the latter.

The bottom line is that the Greek government has been running up debt and making promises that couldn't be kept.  They have tried to delay the inevitable and the interest rates on government bonds are indicating that there is no more delay possible.

At an 88% interest rate (who knows what it will be tomorrow), I wouldn't recommend buying any Greek debt right now.  I believe a default is coming very shortly.  Hold on for a wild ride.  We could see the U.S. dollar get a boost from this.  It is harder to say what will happen with gold in the short term.