Portugal, Ireland, Italy, Greece, and Spain are collectively known as the PIIGS. Their economies are wobbling badly and their debt load is crushing. Greece in particular may be on the verge of defaulting on their debt. While they insist everything is just fine and we can handle our own affairs, the EU may be on the verge of bailing them out. You see, Greece is part of the EU and uses the euro as its currency. Plus, banks in other EU countries have massive exposure in Greece.
The cost of credit default swaps protecting against losses on Greece are soaring in cost, always an ominous sign. This may seem arcane, it’s not.
“Technically, the term is that it’s getting smacked,” said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London. “Clearly what’s happening is very negative and could lead to a vicious circle.”
Are speculators piling in here, exploiting Greece for their own financial gain, even if this exacerbates things, making defaults even more likely? Absolutely.
It now costs $397,000 a year to insure $10 million of Greek government debt against default for five years… That compares with $34,000 for Germany.
Government debt is generally thought to be a safe, boring, reliable investment. Yet five years of protection on Greek government debt costs nearly $2 million, or 20% of what you are insuring.