Sovereign debt market developments last week were marked by one main event, the debt Greek debt swap that took place on Friday, March 9. After the hair cuts to Greek debt agreed last week with the IIF, followed by the ISDA’s rulling that that part of the debt restructure did not amount to a credit event, this week, the last stage of the restructure focused on the debt swap of 31.5% of the debt.
After a threshold majority of bond holder participation was reached on Thursday, it was possible for the Greek government to exercise Collective Action Clauses (“CACs”), which caused the ISDA to consider that a credit event had taken place, thus triggering CDS payments to the bond holders.
There were some interesting patterns in the movements of government bonds. The movements were characterised by a local/global peak on Tuesday followed by a local/global trough on Wednesday, followed by differenciated movements during the rest of the week. These 3 patterns, although in different scales, point to the relevance of shared events.
Tuesday’s peak in yields was probably caused by poor GDP data for the EU and the Euro-zone. While this hypothesis may be true it poses some theoretical problems, in light of the fact that having fallen by 0.3 %, it was exactly what the markets expected. If that was true, then this fact should have been incorporated into the price already, and so would not have been news per se. Alternatively, we may simply think of it as the effect of confirming expectations or the fact that the expectation was not a confident one.
The troughs that followed were probably the joint effect of the ECB’s policy of keeping the rates stable.
However, it is not impossible that the Greek debt exchange had different effects in different countries. While the core experienced falling yields as its obligations and associated costs of “bailing out” the periphery, reflecting dissipating stakes in it, the periphery experienced a rise in yields in light of the now more likely prospect default.
Could contagion be rearing its ugly face again? Only time will tell…
I’m sure many more interesting things happened. For complementary comments on financial market developments you might be interested in reading the Keystone Speculator blog. You might also want to pay a visit to the EU Blogging Portal’s “The Week in Bloggingportal” as well as the blogroll itself.