{"id":724777,"date":"2010-04-27T12:46:00","date_gmt":"2010-04-27T16:46:00","guid":{"rendered":"http:\/\/www.businessinsider.com\/2-year-greek-bond-yield-breaches-15-2010-4"},"modified":"2010-04-27T12:46:00","modified_gmt":"2010-04-27T16:46:00","slug":"plug-greeces-latest-soaring-bond-yields-into-this-debt-trap-equation-and-watch-the-whole-thing-spiral-out-of-control","status":"publish","type":"post","link":"https:\/\/mereja.com\/index\/724777","title":{"rendered":"Plug Greece’s Latest Soaring Bond Yields Into This Debt-Trap Equation And Watch The Whole Thing Spiral Out Of Control"},"content":{"rendered":"

According to Bloomberg, Greece’s 2-year bond continues to rout, and now yields 15.07%. The 10-year is moving in the same direction, now yielding 9.76%. Remember, even at previously lower yields, Greece looked set on the path for default:<\/span><\/a><\/p>\n

‘[Before:] In order for Greece to simply stop increasing its total outstanding debt, it thus has to achieve a primary budget surplus of about 7.44% if interest payments are not to push the budget into deficit, according to Mr. Münchau. This is assuming the economy doesn’t grow. If the economy can manage 2% growth, then Greece needs a 4.96% budget surplus just to tread water.”<\/p>\n

The above analysis, originally from Eurointelligence<\/a>, used the simple yet effective ‘debt sustainability rule’ to calculate what budget surplus is necessary to keep the total national debt from growing, based on interest rates and GDP growth.<\/p>\n

It is calculated as “the break-even primary balance (PB) requires a country to sustain the debt-to-GDP ratio (b), with marginal interest on future bond issues (i) and the rate of nominal growth (g): PB = b*(i-g).” In Greece’s case a recent value for debt-to-GDP (b) is 123%.<\/p>\n

But… it was based on the older, lower bond yields. Now things are even worse. If we plug the latest 9.76% 10-year bond yield into the equation, we get the following. (Note we aren’t even plugging in Greece’s 2-year yield, assuming the country would borrow for ten years instead to fund itself. It works for our purposes, this is a back of the envelope)<\/em><\/p>\n

\"Chart\"<\/p>\n

This table shows that even with strong 4% GDP growth, Greece would need to achieve a huge 7.08% budget surplus just to keep its debt to GDP ratio from rising further. <\/strong>Too bad Greece’s economy is expected to contract this year, rather than grow, and it has a budget deficit, rather than a surplus!<\/p>\n

Thus the latest spike in yields means Greece is truly a goner. Note this is even with the planned IMF 45 billion euro bailout. Markets know the bailout is coming yet are still pushing yields higher.<\/p>\n

The math above makes it clear. Debt\/GDP will likely rise rapidly this year due to a shrinking economy and a huge budget deficit. As debt\/GDP rises, it only makes the equation above even uglier — It becomes harder and harder to dig yourself out of the hole.<\/p>\n

This is the debt trap in action.<\/p>\n

Join the conversation about this story »<\/a><\/p>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

According to Bloomberg, Greece’s 2-year bond continues to rout, and now yields 15.07%. The 10-year is moving in the same direction, now yielding 9.76%. Remember, even at previously lower yields, Greece looked set on the path for default: ‘[Before:] In order for Greece to simply stop increasing its total outstanding debt, it thus has to […]<\/p>\n","protected":false},"author":4069,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"advanced_seo_description":"","jetpack_seo_html_title":"","jetpack_seo_noindex":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[4821],"tags":[],"class_list":["post-724777","post","type-post","status-publish","format-standard","hentry","category-news"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9NivD-32xX","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/mereja.com\/index\/wp-json\/wp\/v2\/posts\/724777","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.com\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.com\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.com\/index\/wp-json\/wp\/v2\/users\/4069"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.com\/index\/wp-json\/wp\/v2\/comments?post=724777"}],"version-history":[{"count":0,"href":"https:\/\/mereja.com\/index\/wp-json\/wp\/v2\/posts\/724777\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.com\/index\/wp-json\/wp\/v2\/media?parent=724777"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.com\/index\/wp-json\/wp\/v2\/categories?post=724777"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.com\/index\/wp-json\/wp\/v2\/tags?post=724777"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}