Echoes of subprime ring out across Greek crisis

by Eric Posner and Mitu Gulati

Financial Times
June 28 2010

In June 1992, Greece issued five-year bonds with a face value of $250m at a rate of 8.25 per cent. The spread between the five year Greek bond and the equivalent German Bund was roughly 228 basis points. Greece had a deficit of 11.5 per cent of GDP and a debt to GDP ratio of 110 per cent. Its S&P credit rating was a miserable BBB-.

In June 2008, Greece issued five-year bonds with a face value of $1.5bn, at an interest rate of 4.625 per cent. This time the spread with the equivalent German Bund was only 113bps, half of what it had been in 1992. Greece’s S&P rating was now a respectable A. Yet the underlying numbers had not improved that much. The deficit was 5 per cent of GDP and the ratio of debt to GDP was 98 per cent. And Greece was known to have fudged its financial health in official data.

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