(*The Random House definition of the phrase “Nero fiddled while Rome burned” is: heedless and irresponsible behaviour in the midst of a crisis.)

Well, this is getting interesting, and Greece is finally starting to garner the headlines it deserves. Now the yield on Greek bonds with 2 year maturities has risen to just short of 20% (UK 2 year bonds yield around 1.4%), indicating that the market is now anticipating a restructuring of Greek debt. Whether this happens or not is still uncertain but this afternoon we hear that the German government will seek parliamentary approval for aid to Greece of up to €8.4 Bln in 2010, and for an unspecified amount for 2011 and 2012, according to a draft bill.  However what is clear is that the EU/IMF “rescue package” of €45 Bln, if ever implemented, is not enough as it does not begin to cover the refinancing needed over the next two years and was only supposed to be three years in duration, creating another refinancing issue. However, IMF Managing Director Dominique Strauss-Kahn has been cited on German TV saying that the cost of saving Greece could be as much as €120 billion. If so it asks some very awkward questions about the Eurozone and whether these funds will be genuinely forthcoming in light of the fiscal position of other EU nations.

Put simply, if you look at the most optimistic Greek government figures on debt and deficit reduction they don’t compute without depression. Something has to give and within the legal confines of the EU it is hard to see what. In the meantime a crisis meeting has been pencilled in for May 10^th (conveniently after the German regional elections) but the way things are developing this may be far too late, and is representative of an EU response which almost perfectly defines “heedless and irresponsible behaviour in the midst of a crisis”. Hopefully the stories emerging that we will see an agreement reached this weekend will prove to be correct, although we remain sceptical.

Some Good News

The exposure to Greek debt across the EU banking system is perhaps not quite as bad as thought. France in particular looked very dicey; however reviews of the figures indicate that much of the exposure is actually a result of the two major French banks having subsidiaries in Greece, while German exposure looks manageable in the short term. This at least reduces the risk of a systemic crisis like Lehman’s. However, should other dominoes fall this may change.

And in the US

There are some hopeful indications that the US recovery is becoming self sustaining with April consumer confidence figures beating expectations on the upside, with the number coming in at 57.9, up from 52.3 in March.

This pleased us, and briefly we felt good. Then we looked at a chart, which looks back to the levels since the mid sixties, and, well, were a little depressed to see that 57 is lower than most recessionary bottoms (apart from last years), while boom times go up to 140. It's all about the level. 

(Apologies for not including the chart, apparently Bloomberg charts don't want to work with this blog!) 

 On the upside this low level means that we are unlikely to see the US Fed take a tightening stance this evening (our time), which should keep equity markets reasonably happy as many strategists see the beginning of fed tightening as a key indicator to take profits and reduce equity exposure.

However even after yesterday’s sharp downward movements in share prices, with so much uncertainty around, stock markets continue to look complacent compared with bond markets. Indeed the whole Greek debacle appears to be taking investors’ minds off exactly what it shouldn’t: namely the true implications of fiscal tightening in the developed world. With the high debt growth model of the last decade dead, how can we expect to see robust growth as government spending is cut to the tune of several percentage points of GDP, per annum, across the developed world? Still, that is enough worry for today so we will return to this shortly, perhaps after Thursday’s debate.