Though a Debt-Default Would Hurt, Investors May Not Give Up on Greece

by Paul Hannon

Wall Street Journal
April 19, 2011

What was once unimaginable is now highly probable, and a member of the euro zone, the world's second-largest economy, looks likely to default on its debt. It's an outcome for which bond investors have been preparing themselves for some time, such are the stratospheric levels to which Greek bond yields have climbed in recent months, and certainly since the German government first began to acknowledge the possibility of a restructuring in October last year.

At almost every step of the euro zone's fiscal crisis, the currency area's policy makers have seemed unprepared for any but the rosiest of outcomes, despite the fact that actual outcomes have generally been the worst possible.

Indeed, for many years, the behavior of bond investors wasn't much different. Until August 2007, the yields they were prepared to accept on the debts of Greece and other governments that now face big fiscal problems assumed that those economies really were becoming more like Germany's, even when it was clear they weren't.

In essence, bond investors bought one of the euro zone's basic sales pitches, and didn't spend too much time checking whether it was true. The story was that those economies with what one might call a checkered past would be put on the straight and narrow by Germany, which, for reasons of history, had a deep aversion to fiscal irresponsibility and high inflation.

But since the crisis began, investors have become more and more focused on the particular situations in which countries find themselves, and are horrified by what they see.

More