July 3, 2015

If you assume that the German Benchmark Yield Curve represents the Eurozone Risk Free comparison, then the spread of Greek versus German Bond Yields can be used to calculate the “Implied Probability of Default” already discounted by Greek Bonds at various assumptions for the Recovery Rate (the amount of money you expect to recover after default).

2015.03.07.GreekDefaultProb

The 5 year Greek Bond fully discounts 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.

Easy to see why some Hedge Funds have taken a position… default pretty much fully priced at these levels across the curve with half recovery; not an unrealistic expectation.

A 2009 Moody’s publication “Sovereign Default and Recovery Rates, 1983-2008” found for 13 defaults a value weighted recover rate of 30-40% (depending on method). Either way, with that type of recovery rate in Greece, default is fully priced in…

 

MONOGRAM CAPITAL MANAGEMENT