I make no excuses for returning to the Greek tragedy, although I have very few for referring to Nick Clegg in my last post as “Nigel”, apart from the transient and immemorable nature of many Lib Dem leaders and my proximity to pensionable age whenever that might be.

Less than a week ago 10 year Greek bond yields were approaching 8%. Since then they have flirted with 9% before closing on Friday at 8.6%. Even worse is the fact that short term bond yields have reached 11%. Such an inverted yield curve suggests that the day of reckoning is ever closer as investors demand a larger and larger premium for supplying Greece with cash flow let alone long term borrowing.

The real tragedy is that this will all turn out far worse for the rest of Europe than Greece itself, which is quite used to financial, economic and social turmoil. A helping hand has been proffered and the Greeks are off to the IMF to shake it, although it may turn out to be an iron fist. The chances of any EU participation look very slim with 86% of Germans saying it is wrong to bailout the Greeks according to a poll in one of their “Sundays”.

As ever the meat in the “problem” sandwich is the banking system. Total Greek sovereign debt exceeds €320 billion and a great deal of it is held by European banks. The Americans, who seem oblivious to the fact that an IMF bailout is going to cost them money too, have at least poured huge sums into their banking system, which is still fragile, but, arguably, much better capitalised than some in Europe.

Greece is an unwelcome reminder to the world’s central banks, as if they need one, that rising short term interest rates create exceedingly unpleasant and intractable problems. Bernanke, as Jeremy Grantham of GMO, puts it in his latest quarterly bulletin (a must read https://www.gmo.com/Europe/Research/default), has been infected with “Greenspanism” and rates in the US will be on hold for some time, but others, especially in the more “porcine” parts of Europe, and perhaps the UK, may be less fortunate.

Activating the rescue mechanism and turning over economic policy to EU and IMF oversight is “a new Odyssey for Greece,” Papandreou said on Friday. “But we know the road to Ithaca and have charted the waters,” he said, referring to the return of Ulysses to his island home after a ten year absence. Holders of ten year Greek paper will shortly be finding out that the current tragedy is not a myth…

This chart (courtesy of Fullermoney) of the Greek 10yr bond yield tells you all you need to know about the fortunes of Hellenic debt. Before the last bailout announcement, the fourth, the yield briefly touched 7.5%, hit 6.5% on the “good” news but is now approaching 8%.

Rumours abound of a contrived “default” that would allow a reduction in the amount of outstanding bonds that would not trigger a payment to those who have bought CDS “insurance”. The main German opposition party has said they will not support the bailout that requires parliamentary approval, so the deal is as good as dead. This is perhaps why the IMF has started talking up a fund raising campaign as they may well be the banker of last resort.

Thus far the Eurozone governments have shown insufficient aptitude to run a whelk stall, on this issue and many others, and Nick Clegg is likely get a hard time on Thursday’s debate trying to defend the Lib Dems pro-European credentials. Cameron has gone out of his way to avoid making the election a “euro” issue, but it may turn out to be his trump card. Kenneth Clarke (leader of the Conservative pro-Europe wing) has weighed in with a comment that a hung parliament might lead to a visitation from the IMF and Cameron will want to distance himself from the “old” Tory brigade. This campaign has two debates to go and some considerable distance to run!

With the election hotting up faster than a pyroclastic flow someone has to get the blame for not being able to fly away from it all! Brown/Cameron/Clegg – select according to your political peccadillo.

 The spread betters are now firmly in hung parliament territory. The current odds would give the Tories the most seats, but an overall minority of circa twenty. Labour and the Lib Dems would have around 300 between them so the SNP, Plaid Cymru and the Ulster constituencies hold the whip hand. Guess who’s wishing he hadn’t signed up for televised debates? Thatcher and Blair both declined as they had almost certain majorities and the belief that debates could only do them harm, as Cameron is beginning to find out. The Lib Dems must be hoping there isn’t a skeleton in Clegg’s cupboard; something of a recurring nightmare for them; Jeremy Thorpe and Charles Kennedy to name but two.

Our last hung parliament was in 1974 when the incumbent Tories gained 297 seats, Labour 301 and the Liberals 14. Heath tried to form a coalition with the Liberals, but failed. Wilson presided over a minority government for another 6 months before calling another election; winning by a majority of 3 seats.

 The following 5 years were beset with a myriad of economic problems; the pound was devalued, interest rates and bond yields were well into double figures; as was inflation. How would the markets respond this time round? Whilst it is unlikely that base rates will move much, given the fragility of the economy, sterling is certainly in the firing line and if the “n”th Greek bailout fails the bond vigilantes will be looking for another candidate.

 If the Lib Dems get more seats than currently predicted, which would give a coalition, with Labour, a working majority, then Vince Cable has the shortest odds of getting the top ministerial spot at No. 11 and I think that would spook the City. The uptrend in FTSE is still intact but Friday saw the biggest down day since the middle of February, on news that Goldman’s is to be sued by the SEC, and the UK and Germany are lining up to join in – next time around I will be a lawyer…

 It would not be surprising to see the market down to 5500, which is the bottom of the trend channel, in fairly short order, and an indecisive election result on May 6^th would make a “little bit of ash” the least of our worries.

Where have I read this before? At least three times over my cornflakes in as many weeks. To quote Yogi Berra, “It’s like déjà vu all over again.” For the sceptics who believe that markets aren’t manipulated (are there any left?) this is going to come as a blow.

 The package “sends a clear message that nobody can play with our common currency and our common fate,” Greek Prime Minister George Papandreou told reporters. On Friday three-year bond yields were 7.2% yet the EU has offered €30 billion of funding at circa 5% with, apparently, “no strings attached”. Who is playing with whom? Short covering has bought the market back with a thump this morning, but yields are still over 100bps above the bailout rate.

 The EU offering will give Greece some breathing space until the end of the year; they need €30 billion just to cover this year’s funding costs and the annual budget deficit. The Greeks have been profligate over spenders since Pontius was a “Pilot” and historically allowed the drachma to take the strain; not an option in euro land…

 Your average Greek is not going to take the government’s austerity measures lying down. It’s not the way the Greeks do things. A lot of column inches have been penned about the need for political union before the euro experiment will work, but very few on social union, which is not the same thing. I am not playing the nationalistic card here (although if you have tried passing off a Scottish ten pound note in a provincial UK pub you will know what I mean!); it’s a “way of life”.

 The EU rules are clear on budget deficits and government borrowing and the Greeks are “out of order” (and not alone) and should have to pay the price; the market price. Now no one is going to shed any tears about Goldman’s losing “a few billion” on short covering, but eventually Mr Market will have his say.

 As Oscar Wilde said, “a cynic knows the price of everything and the value of nothing.” The eurozone governments may have “fixed” the price of Greek debt, but they truly know nothing about value…