More Market Craziness - Negative Interest Rates In Greece

On today’s show we’re talking about another of the many distortions that exist in our world.

I’ve been to Greece many times. I love the food. I love the weather. I love the islands, and the rich ancient history. My father was born on the island of Rhodes and he was born in a home inside the old walled city in Rhodes. The fortifications date back to the time of the Knights Hospitaler and were built in the 1300’s. My fathers house was built in the 1400’s. Prior to 1910 the island was under Turkish occupation. Then from 1910 until the end of the second world war it was under Italian occupation, before finally being returned to Greece after the war. I love going to Greece.

But Greece is a chaotic place. The culture in Greece is one of rebellion. It’s common for traffic violations to happen directly in front of police officers with zero consequence. Greece also struggles to have strong enforcement of tax collection. The underground economy is alive and well. Not surprisingly, Greece is also mired in debt. One sovereign debt crisis after another has befallen the country. The country has struggled to pay its bills. The solution?

Each and every time, its creditors have loaned it more money even though it was obvious that they didn’t have the political will to implement the austerity required to improve their balance sheet. But since a default was too distasteful for the creditors, it was easier to loan them more money and kick the can down the road. By the time the next crisis hits, hopefully the decision makers at the bank will be retired and it’s no longer their problem.

This week, Greece entered the Negative Club. What is the negative club you ask?

Greece sold debt offering less than 0% for the first time on Wednesday in the latest sign of how far investors will go in a hunt for returns amid a global slump in yields.

The Greek government issued €487.5 million ($535.31 million) of three-month debt at a yield of minus-0.02%. At a previous auction for bills with similar maturity on Aug. 7, the rate was 0.095%.

The move reflects a broader shift in European bond markets in recent years, with investors paying governments from Germany and Switzerland to Italy to hold their money as the European Central Bank cuts borrowing costs to bolster economic growth in the region. That also means investors are being forced to take on more risk to generate returns, with Greece long considered the final frontier.

The nation, which emerged in August 2018 from an eight-year international bailout program following a prolonged debt crisis, has been welcomed back into the bond market with strong demand for its debt. 

While the Greek government so far has issued only very short-term debt at a negative yield, other European governments are borrowing through longer-dated debt that pays no interest. Germany, for example, sold 30-year debt at a negative yield for the first time in August.

The yield on the government debt has tracked improvements in the Greek economy, suggesting that debt holders are “not as worried" they’re going to lose money as they were in the past. So the question is would you be willing to lend money to the Greek Government for 90 days and make the bet that they won’t default in the next 90 days?

But more importantly, would you be willing to lend money to the Greek Government at negative interest rates, even if it's for only 90 days?

Perhaps purchasing a 90 day bond from the Bank of Canada at 1.75% would be a better bet. I know, I know, you would face costs associated with the foreign exchange that would negate any earnings. Europe is a family. Within every family, not all members are an equal credit risk.

The very idea of lending money to my cousin who has a spending problem because I don’t know what else to do with my money seems a little crazy.