Greece and Peripheral debt

Posted by

The Dutch Central Bank recently published a working paper that uses event studies to measure the impact of news about the Greek bailout on Peripheral Sovereign Bonds and bank equity returns.

They find that bail-out news has significant explanatory power for explaining (short term) movements in both bond and equity markets.

Sensibly, they point out that some of this effect is likely to be a ‘wake-up’ call effect – rather than pure contagion.

In current market conditions, I do not see the point in the distinction: are we supposed to be okay with massive mark-to-market losses in the case that owners finally understand the risk of their asset portfolio, but worry about mark-to-market losses when it is irrational fear driving prices down?

If anything, i think the distinction works the other way around – fear-based contagion is okay, as at some price investors will buy the cheap assets. In contrast, a rational re-val is not self-correcting – as the assets do not get cheap, they just get ‘fair’.

The Vox-pop summary is here.