Just a quick note on Greece. The other day I noted that Greece could be asked to restructure its debt as part of a rescue. This is not something many investors expected in this age of too big to fail. Now experts much more qualified than yours truly are concerned about a restructuring.
S&P downgraded Greek sovereign debt three notched from BBB+ to BB+ That is below investment grade. S&P expressed concern that a Greek restructuring could be on the way. An economist at a large U.S. bank opined that bondholders could receive a 20% to 30% haircut.
Greece could be the start of even bigger problems for the EU. Greek banks posted Greek sovereign debt as collateral for ECB financing. It is possible that otherwise healthy Greek banks will be shut out from short-term liquidity. With the crisis beginning to spread to other troubled and heavily indebted economies, such as Portugal and Spain, there could be a real banking crisis brewing in the Old World.
Even before this I, and most other fixed income experts (including those at the Fed) believed that long-term treasury rates would remain low. Now with Europe in turmoil, the 10-year treasury may be hard pressed to break over 4.00% during 2010. Morgan Stanley's forecast of 5.50% on the 10-year by December looks ridiculous at this point. I hope there weren't going short the 10-year. Oh, Mr. Levin!!!!!
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