By Barry Elias

August 24, 2011

Twenty Three percentage points !

That represents the current difference in yield between 2-year and 10- year Greek government bonds, 39% and 16% respectively.
The yield inversion (2-year exceeds 10-year)  suggests  greater near term  economic risk (e.g., slower  growth).  

Given Greeks financial conundrum, the International Monetary Fund deemed it prudent to lend Greece an additional $157 billion at 3.5% interest.
The Institute of International Finance (IIF) suggests total yield will be reduced by 20% for private bond holders.  This will be achieved by tripling the average bond maturity to nearly 20 years and lowering the annual coupon interest rates.

Jacob Funk Kierkegaard of the Peterson Institute of International Economics indicates this reduction would leave Greece with a debt to GDP ratio of 125%.  He further stated, “The programme is more impressive than many like me had expected in terms of official finance, but I still doubt it is going to put Greece on a sustainable path.”
The IIF projects a 50% reduction may be required to achieve long term stability.

An overlooked issue in this debate has been the indirect exposure to Greek debt.

Indirect exposure represents insurance payments to those insured for debt default (e.g., via credit default swap vehicles).
The two graphics below have been provided by The Bank for International Settlements (BIS).

Item 1:

Note:

    1.  Total indirect exposure to Greek debt held by foreign creditors is roughly 30%.
    2.  The US is responsible for 56% of the indirect exposure.

Item 2:

 
Note:

   1. Indirect US exposure to Greek debt represents more than 80% of its total exposure.

   2. Indirect US exposure to Greece, Portugal, and Ireland is approximately $120 billion (more than France and Germany combined).

   3. Total US exposure to Greece, Portugal, and Ireland is equivalent to that of France and Germany.

Despite the recent intervention, Greece and Europe maintain macroeconomic instability.
The repercussions may extend globally.

Barry Elias Biography

Barry Elias is a recognized economist and journalist.

Mr. Elias, a member of the Newsmax Financial Brain Trust, provides weekly commentary to Newsmax Media’s Moneynews.com.

He served as a consultant to many high profile financial institutions, including Oppenheimer Capital, Merrill Lynch, JPMorgan Chase, Bank of New York, and Mellon Bank.

His work has been cited and acknowledged in several recent best-sellers co-authored by Dick Morris, former political adviser to President Bill Clinton.

Mr. Elias graduated Phi Beta Kappa with a degree in economics from the State University of New York at Binghamton.  Following university, he attended medical school at Upstate Medical Center in Syracuse New York.

He currently resides in Manhattan, where he appreciates the diverse cultural offerings.

Mr. Elias may be contacted at the following email address: This e-mail address is being protected from spambots. You need JavaScript enabled to view it This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Written by :

Y Mubarak