Wednesday, July 20, 2011

Greek Bonds Collapse As ECB’s Nowotny Announces Bank Will Compromise, Agree To “Temporary” Greek Default?

Wonder why the Greek 2 Year bond just plunged, sending its yield to a laughable all time high 39.09% (a 312 bps move today alone)? Wonder no more.

According to the ECB’s Ewald Novotny the central bank has folded to German demands, and will now allow a “temporary” Greek default. Of course, what happens next will be a complete freeze in capital markets (see the chart below which shows borrowings on the ECB’s Main Refinancing Operation while itis still available) but who cares: the central planners think they have it all under control.

From Bloomberg:

European Central Bank council member Ewald Nowotny suggested the bank may compromise and allow a temporary Greek default as officials scramble to fix a sovereign debt crisis that’s spreading to Italy and Spain before a leaders’ summit in two days.

As Spanish financing costs surged at a 4.45 billion euro ($6.31 billion) treasury bill auction today, policy makers are trying to ease a split that’s pushed interest rates on Spanish and Italian 10-year debt above 6 percent for the first time since the euro debuted 12 years ago.

The ECB has until now argued that any Greek default could spark a new financial crisis, derailing a German push to make investors help foot the bill for a second bailout of the country.

“This has to be studied in a very serious way,” he told CNBC in an interview broadcast today. “There are some proposals that deal with a very short-lived selective default situation that will not have major negative consequences.” (more)