The Final Stake To The Heart? Greek Unemployment Spikes

It is simple math. High unemployment drives up government support costs to the jobless, and undermines consumer spending. Greece announced today that its unemployment rate rose to 11.3%. That is only modestly high than it is in the US, but Greece faces an unpredented financial crisis in which it must close a budget deficit that is 13% of its GDP. Experts who have looked at the Greek numbers are concerned that they may be “window dressed” to make its easier for the southern European nation to raise money.

According to the FT, after the auction news “Interest rates on 10-year Greek bonds jumped 36.2 basis points to a record 7.84 per cent, taking the spread over the equivalent German benchmark bund to 473bp, also a new record.” But, the market sentiment about the trouble in Greece did not prevent the government from raising $2.6 billion of 13-week Treasury bills. The New York Times reports that “While the 3.65 percent interest the government is paying is nearly a full percentage point below what the most pessimistic analysts had predicted, it is more than double the 1.67 percent it paid Jan. 19 in a similar auction.”

Traders may be buying the short duration bonds as a hedge in favor a Eurozone and IMF bailout of Greece. The rescue would be done at an interest rate of only 5% on long bonds based on comments from Eurozone finance ministers. Investors may also be gambling that the high yield will stay intact as long as Greece does not default, a result that the government and Eurozone leaders say is not an option.

Greece still needs to raise 11 billion euros by the end of May. It will have to honor the commitments on its 13-week bonds as part of the sovereign debt it brings in.

But, high unemployment and deteriorating GDP still mean that Greece cannot cover debt service, if it the coupon is only 5%.

Douglas A. McIntyre