My Big Fat Greek Plan B

I’m not sure if it was a subliminal thing…  considering the news-flow…  but today we had Gyro salads for lunch.  For some strange reason, a salad covered with “meat” shaved from a revolving, heated cone, seemed appealing!  Go figure.

The day was driven by news from the Euro-zone, primarily coming from Greece.

Before the market opened, European Central Bank Executive Board member Juergen Stark resigned, citing a conflict over the Central Bank’s bond buying program.  This cost the market about 150 points at the open.

Then, around 11 a.m., rumors began to circulate about a Greek bond default.  These fears were reignited after Germany’s Angela Merkel announced the formulation of a “Plan B” to protect German banks in the event of a Greek default.  The Plan assumes that a 50% haircut would enure to Greek bond-holders should a default occur.

This news took the market down another 150 points, where it languished for the rest of the day.

More interesting than the effects on the stock market were the effects on Greek Credit Default Swaps (CDS) and U.S. Treasuries.  A CDS basically reflects the cost of insurance against a particular bond default.  The graph that follows shows the pricing of a CDS on 5-year Greek debt:

The graph gets awfully steep on the right-hand side!  Today’s rumors went so far as to predict a default this weekend.  I’m not ready to make that prediction, but the CDS are certainly screaming something.

As for the 10-year Treasury, prices spiked in a flight to quality.  The bond closed the day with a yield of 1.92% — the lowest yield in 60 years.

For now, Europe’s systemic issues are driving both our stock and bond markets.  Until there is more clarity, I think we can expect more of the same.