London, 6 July 2015.
Paul Marson, Chief Investment Officer of boutique investment manager Monogram, comments on the impact of potential Greek default on bond markets.
“If you assume that the German benchmark bond yield curve is equivalent to the risk free rate for the Eurozone, then the spread of Greek versus German bond yields can be used to calculate the “implied probability of default”. This figure is already discounted by various assumptions for the recovery rate [the amount of money one could expect to recover after default].
“The five year Greek bond rate fully discounts a default with a 50% recovery rate, as do the 10 and 30 year Greek Government bonds. The 10 year Greek bond fully discounts default with a 25% recovery rate, as does the 30 year Greek Government bond.
“It’s easy to see why some hedge funds have positioned themselves for potential default, with an expectation that half of defaulted money can be recovered. This is not an unrealistic expectation.
“The IMF just recently suggested a restructuring of the debt, the Greeks want it and our own research suggests they need it. The question is, when, if at all, will the Germans agree to it?, since the market already discounts it.”