Cardinal Trading: Worries about countries at Europe’s periphery are back as Greek bond yields soar towards 9%.
Cardinal Trading says long-term borrowing costs for Greece surged through 8% last week as markets grew jittery over upcoming elections that could throw the country’s chances of exiting its bailout early into chaos.
The coalition government is looking particularly shaky as electoral support for the far-left, anti-bailout Syriza party has been shown to hold a commanding lead in several opinion polls.
Chief economist at Cardinal Trading, Johannes Feinberg said, “These are serious developments. A victory for the Syriza party would result in an immediate voluntary default by Greece and an automatic 50% haircut on all debt due to the country’s creditors including the IMF, the ECB and the European Commission.”
At the height of the European debt crisis, Greece’s 10 year bonds saw yields as high as 36% before European Central Bank President Mario Draghi stepped in and promised to do “whatever it takes” to defend the euro. Markets took this to mean the central bank would stand ready to buy sovereign debt in an operation similar to the US Federal Reserve’s quantitative easing program.
With Europe facing the distinct possibility of entering a recession, pressure is mounting on the ECB to make good on its promise but opposition from Germany is palpable.
“If push comes to shove – as we almost certainly believe it will – Mr. Draghi will go ahead and buy sovereign debt but it will be the absolute last resort,” said a Cardinal Trading analyst.
The firm says it continues to advocate holding precious metals as a safe-haven play despite both gold and silver prices taking a beating this year.
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