Worldwide financial markets have been roiled by the Greece default and possible consequences. Puerto Rico’s ability to make debt payments is also a concern. Greece: Lots of drama this week with Greece and its creditors in a standoff amid conflicting signals from Greece’s leadership. Greece has defaulted on an IMF payment; becoming the first developed country to do so (others include Cuba, Sudan, Zimbabwe). Sunday’s referendum on austerity may or may not lead to a compromise and bailout. Markets abhor uncertainty and this is definitely uncharted territory. The issues are 1) Direct exposure to Greece debt, this is minor, especially among US banks and other financial institutions; 2) “Contagion” if an entity has exposure and that entity is involved in counterparty transactions with other entities, things can spread (think Long Term Capital Management during the 1997-1998 Asian and Russian debt crises). Also, MBIA and other bond insurers could undergo major stress, diminishing their ability to back other debt they insure (this is an issue with Puerto Rico debt). So far, the issues seem to be more of a “dislocation” and “not a meltdown” as US Treasury yields dropped to 2.32% last week before coming back up to 2.42%. So we have not seen a major “flight to quality” panic. CMBS: Spreads have widened about 20 bps over the past 2 weeks. 10 year AAA spreads which were trading as low as Swap + 84 in May are now expected to trade at Swap + 100 to 105, the lower classes of bonds are widening also. The next few pools will be closely watched. Many expect summer to be “choppy” with a rally in the fall, especially if there has been some resolution or “containment” in Europe. New 10 year full leverage loans are pricing at about Swap + 210 to 220 or higher; coupons around 4.70% (remember that we were at 4.00% in late 2014/early 2015). The Fed: Two schools of thought: 1) US economic data continues to be strong (payroll, home sales, retail sales), tomorrow’s jobs report is expected to be strong. Some Fed members have spoken recently in favor of sticking to the schedule, ie “liftoff” in September; or 2) Greece and other issues have given the Fed “cover” to wait until 2016…..stay tuned… David R. Pascale, Jr.
