Greece has raised 1.56 billion euros ($2.11 billion) in an oversubscribed bond issue.
The 12-month bonds yield 4.85 percent, compared to 2.2 percent in January, and the six-month notes yield 4.55 percent, compared to 1.38 percent in January.
I wouldn’t call these bond issues a success.
The yields are still very high, keeping in mind that today’s Greek Treasury bills have short maturities and don’t go beyond one year. The risk for default is not within a year.
In fact, it does not really change the fact that Greece still has very tough times ahead.
"Based on what we know right now, we would not be a buyer of the Greek bonds," said Mohamed El-Erian, chief executive and co-chief investment officer of Pacific Investment Management (Pimco). "We are very cautious toward Greece and we are in a ‘wait and see’ attitude and we would like to see greater evidence of adjustment on Greece.”
Investors should remember that while Greece might have the political will to slash its deficits, it remains locked into the euro at an “overvalued, uncompetitive rate of exchange.”
As of Tuesday, the euro was about 15 percent overvalued, compared to the U.S. dollar on the purchasing power parity (PPP) basis as communicated by the by the Organization of Economic Cooperation and Development (OECD). On the OECD-PPP basis, it would be in equilibrium at around $1.15 per euro.
Let’s not forget that the global economy is only just recovering while huge imbalances remain in place.
All these facts underline that Greece is in a situation of multiple big “imbalances” and therefore still faces brutal challenges that will not go away soon.
When recently speaking about Greece’s debt problems, IMF Managing Director Dominique Strauss-Kahn said: “The only effective remedy that remains is deflation. And this is exactly what the European Commission has correctly recommended.”
Jean-Claude Trichet, president of the ECB, was asked if there is a Europe-wide agenda to solve this problem of imbalances, even accepting a period of deflation and all of its possible social consequences.
“Yes. It is normal that some regions, after growing above the EMU (European Monetary Union) average for some time, and after having accumulated high national inflation, experience a correction and therefore a period of negative inflation, as it is currently happening in Ireland,” Trichet said.
Believe me, this is an extremely important statement.
Yes, these imbalances are bound for making troubles in other southern European countries like Spain, Italy and Portugal.
We also should remember when the deputy governor of the People's Bank of China (PBOC) in late March warned that the Greek debt crisis is “the tip of the iceberg.” He even went as far as to say that the “main concern today is obviously Spain and Italy.”
I don’t think it’s an overstatement to say that all this has done very little to solve the fundamental problems in the euro zone.
Therefore, while a relief rally has emerged in the euro — and it still could have a little way to run — my long-term forecast for the euro is that it must still go lower.
Yes, the euro remains too expensive for its member states that face unbearable imbalances, as well within the European Union.
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