Case Study: Greek Prime Minister, George Papandreou Surprises
Financial Markets, October 31, 2011
Background: The following is the flash headline from FXStreet.
Mon, Oct 31 2011, 18:18 GMT | FXstreet.com
FXstreet.com (Córdoba) – The Prime Minister of Greece, George Papandreou called for
a referendum to ask whether to accept the new bailout or not. He said he will call for a
vote of confidence and rejected elections.
Stocks, Euro Decline on Greek Referendum
Bloomberg.com November 1, 2011
Stocks sank and the euro weakened, while a surge in German bunds sent yields down
the most on record, amid concern Europe’s bailout of Greece will unravel. The dollar
and U.S. Treasuries rallied.
The MSCI All-Country World Index fell 3.4 percent at 4:32 p.m. in New York as gauges
in Italy, France and Germany plunged at least 5 percent. The Standard & Poor’s 500
Index closed down 2.8 percent at 1,218.28. German 10-year yields fell as much as 29
basis points to 1.73 percent. Rates on 10-year Italian and French debt touched euro-era
records above German debt. The euro fell 1.2 percent to $1.3696. Copper and oil paced
losses in commodities after China’s manufacturing growth cooled.
Greek Prime Minister George Papandreou’s grip on power weakened after his call for a
referendum to approve the bailout provoked lawmaker defections from his party and
fueled concern a default would undermine financial stability in the region. European
leaders pressed Greece to uphold the terms of the bailout before a summit of Group of
20 leaders later this week.
“It’s frustrating,” David Kelly, chief market strategist for JPMorgan Funds in New York,
said in a telephone interview.“The danger of having a referendum is that it could be
defeated, in which case Greece presumably would end up defaulting on its debt. Europe
is not addressing the basic problem. They are not giving the peripheral countries a way
out of a recession.”
‘Killing the Market’
The S&P 500 extended yesterday’s 2.5 percent retreat and is down 5.2 percent so far
this week. The index surged 3.8 percent last week, capping a 17 percent rebound from
a 13-month low on Oct. 3, after European officials planned to increase the region’s
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bailout fund to 1 trillion euros ($1.4 trillion) and investors agreed to a voluntary, 50
percent writedown on Greek debt.
“This uncertainty over in Greece is really killing the market,” David Rovelli, managing
director of U.S. equity trading at Canaccord Genuity Inc. in New York, said in a
Bloomberg Television interview. “Every hedge-fund manager and fund manager that
chased the market last week for performance is now looking at anywhere from 4 to 6
percent losses in 3 days. So, it’s not good and nobody knows what to do.”
Gauges of financial, energy and industrial companies in the S&P 500 slid more than 3
percent today to lead losses among the index’s 10 main industry groups, all of which
slid at least 1.6 percent.
Banks Slump
Bank of America Corp., JPMorgan Chase & Co., Cisco Systems Inc. and General
Electric Co. lost more than 4 percent for the biggest declines in the Dow Jones
Industrial Average. Jefferies Group Inc. fell 9.4 percent as investors renewed their focus
on Europe’s financial crisis, prompting the investment bank to say it has “no meaningful
exposure” to debt issued by Portugal, Italy, Ireland, Greece and Spain. Morgan Stanley
tumbled 8 percent and Goldman Sachs Group Inc. fell 5.5 percent.
MF Global Holdings Ltd. (MF)’s bankruptcy filing yesterday underscored the potential for
more contagion from Europe’s sovereign debt crisis. The brokerage, which wagered
$6.3 billion of its own money on European sovereign debt, violated requirements that it
keep clients’ collateral separate from its own accounts, said Craig Donohue, chief
executive officer of CME Group Inc., the world’s largest futures exchange. MF Global
has accounted for all its assets, Kenneth Ziman, a lawyer for the firm, said at a
bankruptcy court hearing today in New York.
Transaction Tax
Nasdaq OMX Group Inc. fell 2.8 percent and NYSE Euronext lost 6.8 percent after
lawmakers said they will introduce measures to impose a transaction tax on financial
firms that resembles a proposal released by the EU. Senator Tom Harkin, an Iowa
Democrat, and Representative Peter DeFazio, an Oregon Democrat, will introduce the
bills tomorrow. Transaction taxes are likely to be discussed at the G-20 summit this
week in Cannes, France.
Manufacturing in the U.S. expanded less than forecast in October as inventories shrank
by the most in a year and production cooled. The Institute for Supply Management’s
factory index dropped to 50.8 last month from 51.6 in September. A reading of 52 was
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the median forecast in a Bloomberg News survey of economists. Fifty is the dividing line
between growth and contraction.
Federal Reserve policy makers started a two-day meeting today to discuss monetary
policy and the economy. Central bankers are considering buying mortgage-backed
securities to push down borrowing costs and help homeowners refinance their debt.
That would reduce monthly payments, freeing up cash for other purchases that could
spur the economy and reduce unemployment, Fed Governor Daniel Tarullo said Oct.
20.
European Stocks
The Stoxx Europe 600 Index declined 3.5 percent, the biggest drop in almost six weeks.
Greece’s ASE Index slid 6.9 percent, the most in three years. The National Bank of
Greece SA, Banco Comercial Portugues SA and France’s Societe Generale SA and
Credit Agricole SA tumbled more than 12 percent. Credit Suisse Group AG (CSGN)
sank 8.2 percent after the Swiss bank reported earnings that missed analysts’
estimates.
Yields on Italian 10-year debt surged to as much as 4.55 percentage points above
German bunds, while French rates climbed to 1.23 percentage points above. The
Belgian-German 10-year yield spread widened to a euro-era record 2.66 percentage
points. Greek two-year note yields surged as much as 11 percentage points to a record
88.81 percent.
The yield on Sweden’s 10-year bond dropped 24 basis points to 1.70 percent, and
Norway’s yield slid 17 basis points to 2.53 percent. Sweden and Norway don’t use the
euro currency.
Treasuries Rally
U.S. Treasuries rose, extending the biggest rally in 30-year bonds since March 2009.
Thirty-year yields slid 14 basis points, or 0.14 percentage point, to 2.99 percent, after
sinking 24 points yesterday. Ten-year yields fell 13 basis points at 1.99 percent.
The euro depreciated 1 percent to 107.30 yen, while Japan’s currency slipped 0.2
percent to 78.31 per dollar. The Australian dollar weakened versus 14 of its 16 major
peers, falling 1.8 percent to $1.0346.
The Dollar Index, a gauge of the currency against six major peers, climbed 1.5 percent
to 77.29 and is up 3 percent in two days, its biggest increase in almost three years.
The cost of insuring against default on sovereign debt surged the most in almost four
months with the Markit iTraxx SovX Western Europe Index of credit swaps linked to 15
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governments jumping 31 basis points to 335 basis points. Contracts on Italy soared 73
to 519 basis points, France’s were up 16 at 192 and Germany’s climbed 11 to 95 basis
points.
Merkel, Sarkozy
German Chancellor Angela Merkel and French President Nicolas Sarkozy called for the
implementation of the European deal to write down Greece’s debt, saying that carrying
out last week’s summit decisions is “more necessary than ever today. ”Merkel and
Sarkozy will meet in Cannes tomorrow to discuss Greece before the G-20 summit on
Nov. 3, Merkel’s chief spokesman Steffen Seibert said in an e-mailed statement.
Papandreou will proceed with plans for a referendum on the Greek financing package,
government spokesman Angelos Tolkas said in statements televised live on state-run
NET TV. Tolkas said Papandreou would win a parliamentary confidence vote planned
for later this week.
Most of the 1,009 people surveyed in Greece on Oct. 27, the day the new bailout
package was announced, said the accord should be put to a referendum, according to
the results of a Kapa Research SA poll, published in To Vima newspaper. Forty-six
percent said they’d oppose the plan at such a referendum. In the same poll, more than
seven in 10 favored Greece remaining in the euro.
‘Disorderly Default’
Greece’s referendum poses a threat to financial stability in the euro region and
increases the risk of a “disorderly” default, Fitch Ratings said. Papandreou’s grip on
power weakened before a confidence vote on Nov. 4 as six senior members of the
ruling party called on the prime minister to step down, state-run Athens News Agency
reported, without citing anyone.
“The risk of a Lehman-style disorderly default now looms a bit larger than before,
including some residual risk that Greece may leave the euro zone if it rejects the offer of
orderly debt relief in exchange for harsh new spending cuts and reforms,”Holger
Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, wrote in a
note.
Emerging Markets
The MSCI Emerging Markets Index declined 2.6 percent and is down 4.1 percent in two
days. The Hang Seng China Enterprises Index slid 3.1 percent. Benchmark stock
indexes fell at least 2.2 percent in Russia, Turkey, and the Czech Republic. The ruble
weakened 1.3 percent against the dollar and South Africa’s rand slid 1.6 percent.
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Addendum:
The following tables and charts show the impact of the Greek announcement on specific
financial markets.
Stock Markets (Tuesday, November 1, 2011)
DJIA:
- 297.05 (-2.48%)
FTSE 100 (UK):
- 122.65 (-2.21%)
CAC 40 (France): - 174.51 (-5.38%)
DAX (Germany):
- 306.83 (-5.00%)
Athens Index:
- 55.93 (-6.92%)
Nikkei 225 (Japan): - 195.10 (-2.21%)*
*Wednesday, November 2, 2011
Credit Default Swap Market (Greek Government Bonds)
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Bond Markets
Yields to Maturities on Outstanding Greek Government Bonds
Friday, October 28, 2011
Maturity Date
Coupon
05/2014
4.50%
6/2020
6.25%
Yield to Maturity
60.32%
24.24%
Wednesday, November 2, 2011
Maturity Date
Coupon
Yield to Maturity
05/2014
4.50%
73.51%
6/2020
6.25%
28.24%
Basis Point Spreads of 10-Year Greek Government Bonds Over 10-Year Bunds
and 10-Year Treasury Bond
Friday, October 28, 2011
Spread over Bunds
Spread over T-Bonds
+2,205
+2,193
Wednesday, November 2, 2011 Spread over Bunds
Spread over T-Bonds
+2,658
+2,641
FX Markets (The following charts are all scaled to GMT)
(Note: George Papandreou’s announcement at 18:18 GMT, October 31)
EUR/USD
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USD/CHF
EUR/JPY
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