How bad is the Greek crisis? 14% bad

04/27/2010 10:30 am EST


Jim Jubak

Founder and Editor,

The yield on 10-year Greek government bonds briefly hit 14% yesterday, April 26, before finishing at just 13.52%. That was an increase of 3.4 percentage points on the day. (Just for reference the total yield on 10-year U.S. Treasuries is 3.75%.)

So much for the European Union/IMF (International Monetary Fund) rescue plan. Investors see squabbling politicians and doubt that the plan will save Greece from default. (For more on how the European Union has let politics defer a solution see my post )

The rout in Greek bonds has spilled over into the market for the sovereign debt of other deficit-heavy countries. The yield on the 10-year Portuguese government bond rose above 5% yesterday, for example.

The best guide to how the market is setting the odds of the crisis expanding to other members of the European Union is the credit default swap market. (Credit default swaps are a kind of insurance against default. The buyer of this derivative is paying a premium to be made whole in case a company or country fails to make good on its debt. Each basis point—100 basis points make up one percentage point—in the price of a credit default swap protecting $10 million of debt against default for five years corresponds to cost of $1,000)

Here are today’s prices for credit default swaps on Greek government debt—and the debt of Portugal and Spain, the two countries at the top of the list for the next potential crisis: Greek government bonds 764 basis points (up 54 basis points today), Portugal 349 basis points (up 54 basis points on the day), and Spain 204 basis points (up 16 basis points.)
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