Is it really Greek and Latin? Or is it just a game of musical chairs?

“The adoption of a common currency by these countries in 1999 (Greece followed in 2001) led to convergence of interest rates across the continent. Traders no longer discriminated between the euro liabilities of different Eurozone governments, believing that not only currency risks but also the credit risks that had once distinguished well-managed European economies from those with unstable public finances had been eliminated. …

… By 2007, yields on Greek government bonds were barely higher than those on equivalent German bonds. Several states, including Greece, took advantage of what appeared to be inexhaustible supplies of credit at low rates. …

… As European banks struggled with the global financial crisis, the quality of their assets was viewed more sceptically. Credit risks were appraised much more carefully, and interest rate differentials across the Eurozone widened again. Greek bonds appeared less attractive, as interest rates rose and the refinancing of Greek credit became more difficult. The country effectively defaulted on its debts in 2011.”

This is an excerpt from the book “Other People’s Money – Masters of the universe or servants of the people” written by John Kay.

The Greece government was playing the game of musical chairs. As we wrote in the book, “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”, liquidity was the music in this game. The only difference is when the music of liquidity stops, there are no chairs to be found.

Rolling the credit over and over again is a dangerous game. So long as the liquidity is abundantly available and at cheap rates, the game continues. A few victories in this game makes one believe that one is skillful. However, history is replete with examples of disasters when the music stops.

#RidingTheRollerCoaster – 165

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When liquidity is sucked out …

Charles Prince, the then Chairman of Citibank made an infamous statement during the heat of 2007 frenzy, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

He was only stating the old proverb, “Make hay while the sun shines.” in different words.

The problem in all such situations is it is difficult to figure out in advance when the music would stop. And by the time it does, there is a mad scramble at the exit door.

#RidingTheRollerCoaster – 128