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Greek Bonds and the Plan That "Failed Spectacularly"
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By Nathaniel Williams
Thu, 08 Apr 2010 15:00:00 ET |
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Greece has been a mainstay in the news recently as its sovereign debt crisis became Europe's economic albatross. In response to Greece's burgeoning debt, the European Union designed a plan to establish a "safety net" of bilateral and International Monetary Fund support. The idea was to allow Greece to raise its own funds and reduce the necessity of a Greek bailout.
The EU believed that the announcement of their plan would cause borrowing costs to fall in the open marketplace. Their plan needed low bond yields to succeed.
Did bond yields rise or fall? Before I tell you what happened, let me show you what Chris Carolan, the editor of Elliott Wave International's European Short Term Update, predicted by using the Wave Principle.
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In his March 22 European Short Term Update -- days before the EU's plan was announced -- Chris spotted an Elliott wave pattern called "contracting triangle" in the daily chart of Greece's 10-year government bond yields. He labeled the two months of choppy trading a-b-c-d-e (see chart above) and told subscribers that this pattern suggested that yields would advance from their current level of 6.68%:
"It looks like the six-week period that saw complacency return on the topic of the Greek debt crisis is over with the completion of this triangle. Look for a thrust higher in Greek yields now, along with a concurrent re-emergence of the Greek debt crisis in the financial media."
The EU was predicting yields to fall, but Chris forecasted them to rise. What actually happened? The April 7 issue of The European Short Term Update provides the answer.
Greek government bond yields soared to 7.16%, just as Chris's wave analysis suggested. This move occurred despite the EU's predictions to the contrary, dashing hopes that Greece could escape its crisis on its own. One major economist said it best:
"Europe's gamble has failed spectacularly…The surge in yields makes it even less likely that Greece will be able to get out of its fiscal black hole without a real helping hand." (Bloomberg)
The beauty of the Wave Principle is that it provides objective guidelines for predicting where a market is headed. It's not a crystal ball since it deals with probabilities, not certainties, but this example shows you just how useful wave analysis can be.
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Tags: Greek debt, European Union (EU)