Euro at Risk on Critical Test in ongoing Greek Debt Crisis –

  • Greek debt difficulties threaten to force important Euro volatility
  • Key debt auction on April 8, 2015 a key event on the calendar
  • Failure to roll over existing debt raises the threat of Greek default

We’ve recently written on why Greece remains a major threat to financial market stability and the Euro currency itself. And indeed those tensions may be coming to a head as traders send EUR/USD volatility prices significantly higher ahead of the upcoming Greek debt auction. The central point is clear: if Greece fails to refinance expiring Treasury Bills at an acceptable rate, the risks of a larger Greek government default grows significantly.

Key Dates Continue to Warn of Substantial Volatility

April 8 Greek Government to auction €875 million in 178-Day Treasury Bills

April 9 – Greece is to pay €460m to the IMF under terms of first bailout agreement.

April 14 €1,400m of short-term Greek Treasury Bills mature, forcing Greece to roll over into new debt.

April 15Greek Government to auction yet-undetermined amount in 3-month Treasury Bills

A look at FX volatility prices show that traders predict volatility will be especially high through tomorrow’s close, while 1-week and 2-week volatility prices are significantly above even one-year options.

Euro 1-Day Volatility Prices Are Substantially Above 1-Year Prices – Underline Urgency

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Euro at Risk on Critical Test in ongoing Greek Debt Crisis

Data source: Bloomberg. Chart source: R, ggvis

As we wrote last week, some of the most sophisticated traders in the world believe that the coming two weeks will bring substantially more uncertainty than the coming year. This is somewhat illogical—there’s far more you can’t know about 365 days in price action than you can expect in 24 hours. Yet it underlines the urgency of upcoming risks.

What’s at Stake?

If the Greek government fails to hold a successful auction for a relatively modest €875 million in 178-Day Treasury Bills it will signal that investors have all but lost confidence in its solvency.

As it stands most of the Greek government’s short-term debt is held by domestic banks. In normal circumstances those same banks might step in and buy more Greek debt. Yet the domestic financial sector is heavily dependent on substantial Emergency Liquidity Assistance (ELA) from the European Central Bank for its own liquidity. European officials have already told Greek banks that they are not to increase their holdings of short-term government debt.

Demand for tomorrow’s auction will have to come from private investors—domestic or abroad—to cover any gaps for the embattled Greek Treasury. The secondary market for the maturing debt shows that private investors are demanding a usurious 35 percent effective annual yield for debt maturing next week. This is a dangerous signal that private demand will not cover the shortfalls of what Greek banks cannot buy themselves.

Yield to Maturity on Greek Treasury Bills due April 14 Surges to Usurious 35 Percent

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Euro at Risk on Critical Test in ongoing Greek Debt Crisis

Data source: Bloomberg Generic Pricing (BGN). Chart Source: R

The apparent lack of private demand for its Treasury Bills leaves the Greek Government at risk, and ultimately its best hope may rest on purchases from other sovereign governments. And indeed Greek Government officials have made very public overtures to curry favor with Chinese and Russian governments as of late. Whether or not this results in actual bond buying remains to be seen.

Euro Reactions are Far from Predictable

We’re entering a critical stretch for the ongoing Greek sovereign debt crisis, and the next 24 hours may determine near-term direction in the Euro and domestic financial markets.

If the upcoming Greek debt auction fails to elicit sufficient interest, we could see substantial Euro volatility and broader financial market turmoil. Heightened sovereign risks could discourage market makers from making prices in EUR pairs, and in effect this means that the Euro could both rally and fall sharply on any news headlines.

Any surprises could force substantial market moves, and traders should limit trading leverage—particularly in EUR pairs—ahead of the key dates.

— Written by David Rodriguez, Quantitative Strategist for

Contact and follow David via Twitter:

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Bond market turbulence grips fragile euro zone states

* Greek 10-year yields rise above 8 pct

* Spain spreads widen ahead of auction

* Investors start to lose faith in ECB QE

By John Geddie

LONDON, Oct 16 (Reuters) – Borrowing costs for some of the euro zone’s most highly indebted southern states jumped on Thursday, as fears of a global growth slowdown and the absence of any near-term monetary stimulus gripped financial markets for a second day.

Greek bonds suffered another rout, with 10-year yields rising above 8 percent, while a sell-off in Spanish bonds boded ill for a debt auction in that market due after 0830 GMT.

Strategists took some comfort from a rebound in European shares which some said had accentuated Wednesday’s bond sell-off. Others worried that investors had started to question the European Central Bank’s ability to help stave another euro zone sovereign debt crisis.

“It’s early days … but if the market loses faith in what monetary policy can do to fend off falling global growth and the risk of deflation then it could become a much more serious issue,” KBC rate strategist, Mathias van der Jeugt, said.

Coming off the biggest two-day sell off since October 2008, Greek 10-year yields shot up another 30 bps to 8.15 percent .

Greece’s euro partners told Reuters late on Wednesday that Athens was changing its mind about giving up their financial help next year, as bond investors once again closed their door to the serial defaulter.

Portuguese and Spanish 10-year yields 10-year yields rose 8 bps to 3.36 and 2.17 percent, while Italian equivalents were up 10 bps at 2.5 pct, pulling further away from German equivalents which were up 1 bps at 0.78 percent.

Compared with Germany, spreads were all at two-month highs.

Spain is set to auction between 2.5 billion and 3.5 billion euros at a bond sale of 10- and 15-year paper on Thursday, while France plans to sell 6.5-7.8 billion euros of fixed-rate and index-linked bonds.

Market jitters were made worse by a rift in Brussels as France and Italy present 2015 budgets that appear to be in breach of EU targets.

There is also a debate in Europe’s top court as to whether the ECB’s pledge to buy euro zone government bonds is in breach of its mandate and amounts to direct monetary financing of governments.

If the challenges by German lawmakers are upheld, it would likely torpedo a sovereign quantitative easing programme that investors are depending on.

“The ECB only has one card left to play and it doesn’t look imminent,” said one government bonds trader, who was preparing for another sell-off in the euro zone peripheries on Thursday.

With little in terms of euro zone data to digest — other than a final inflation reading — attention is focused on a deluge of U.S. data with markets already starting to trim back expectations of when the U.S. Federal Reserve will raise rates.

Federal Reserve Chair Janet Yellen told a closed-door meeting over the weekend that the U.S. economy was poised to grow about 3 percent going forward, with inflation set to rise toward the Fed’s target, Bloomberg reported on Wednesday.

Other policymakers, however, reiterated that the U.S. central bank should only delay an interest rate hike next year if inflation or wages fail to perk up.

(Editing by Louise Ireland)

Euro stuck in range before Italian debt sale, Greek vote – MSN Money

“The euro is going to drift around $1.25 before the weekend … Rome faces a test on Thursday, when it plans to offer up to 4.5 billion euros of fixed-rate bonds at its mid-month auction. The dollar was flat against the yen at 79.53 yen …

Spain borrowing rates rise, bank shares slide – San Francisco Gate

Spain paid sharply higher interest rates to raise (EURO)2.5 billion ($3.18 billion) in medium-term debt auction on Thursday, reflecting concerns the country will be caught up in the fallout of the Greek crisis, as a recently nationalized Spanish …

Spain sells nearly ?3BN in debt auction –

Spain sells nearly ?3BN in debt auction
MADRID—Spain managed to sell (EURO)2.9 billion ($3.8 billion) in short-term debt Monday amid strong demand but with raised interest rates reflecting investor concern over the country's finances. The successful debt auction came as yields for the key

and more »

Euro dips after Spain auction, ECB eyed –

The euro dipped against the dollar on Thursday as a jump in borrowing costs at a Spanish debt auction highlighted market concerns about Madrid’s economic problems, and the shared currency looked vulnerable ahead of a European Central Bank rate decision.

Euro Is Near 2-Week Low Versus Yen Before Spain Auction – Bloomberg

The euro was within 0.3 percent of a two-week low against the … Australia’s dollar fell versus most major peers before the Reserve Bank sets interest rates at a policy meeting today. The dollar was below 80 yen for a second day.

Italian borrowing costs continue to rise – BusinessWeek


Italian borrowing costs continue to rise
Italian rates, or yields, are rising as concerns about the eurozone's debt crisis are renewed. Italy easily raised (EURO)8.5 billion ($11.23 billion) in an auction Thursday that was oversubscribed 1.7 times, compared with 1.5 times a month ago.
EURO GOVT-Bunds edge higher, focus turns to Italian auctionReuters

all 111 news articles »

French borrowing costs edge up in debt auction – Huffington Post

While demand was healthy, investors pushed for higher yields, or interest rates – an indication of the perceived … The French Treasury had set out to raise between (EURO)9 billion and (EURO)11 billion in a pair of auctions and easily hit …

In Euro Zone, Austerity Seems to Hit Its Limits – Ocala

In Euro Zone, Austerity Seems to Hit Its Limits
Rates have fallen since then, especially on short-term notes. At an auction Wednesday of Italian six-month bills, the yield fell to 3.25 percent from a record 6.5 percent yield a month earlier. But plenty of caution remains — a sale by Italy Thursday