by James Mackintosh
Financial Times
December 18, 2011
Something funny has been going on in Greek debt markets. Even as the yields available on bonds maturing in just a few months have soared to silly levels, the government has been able to raise money at perfectly reasonable rates.
Last Tuesday, for example, Greece issued a bill – a short-dated debt instrument – that matures in June. It raised €3.7bn ($4.8bn), paying 4.95 per cent, annualised. By the standards of ordinary times this would be a disaster; Germany is paying zero interest on similar bills.
But given what is going on in Greece, the auction was not far short of miraculous. Rather than buying the bill from Greece, investors could have bought Greek government bonds in the secondary market maturing just five days later. At the time of the auction these bonds yielded more than 130 per cent, annualised.
Greece’s ability to tap the “market” is a straightforward case of financial repression, where governments use their sovereign powers to finance themselves at below fair market rates.
What is going on in Greece is a reworked version of the old principle of printing money to pay government debt (“monetising” it), this time via the banks. Such tricks are likely to become increasingly common as governments grapple with horrific debts.
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