European Central Bank (ECB) president Mario Draghi’s recent comment that the ECB is ‘comfortable with acting’ in June if necessary to combat deflation, and his numerous promises to do whatever is necessary to keep the eurozone intact has driven bond yields down for the eurozone periphery.

But even with his guarantee, Draghi would need to drum up political support for another round of bailouts, and according to Evergreen Capital Management/ Gavekal CIO David Hay current yields simply don’t reflect the actual level of risk that investors are facing.

“It wasn’t in the distant past, but rather just a couple of years ago, when Greece’s repetitive deadbeat status caused its interest rates to vault into the 35% plus range,” writes Hay.

Greece effectively defaulted: Hay

Even though it was structured to avoid using the word, Hay says that Greece effectively defaulted when many of its creditors were forced to take a nearly 50% haircut. This cut the country’s debt-to-GDP ratio by 40%, but it is already back up to about 180%. If Greece has to restructure its debt once again, there’s no reason to expect private creditors to get better treatment, but Greek bond yields, around 6%, don’t reflect this risk.

Italy has a lower debt-to-GDP ratio than Greece, but at 130% and rising it’s far from healthy. Add in the rising labor costs and falling industrial production, and bond markets would normally demand high yields. Instead, its 10 year bonds have yields near 3%, about half a percentage point higher than US Treasuries, with Ireland, Spain, and Portugal all in the same range.

italy v germany production 0514 PIIGS

italy spain 10 yr yields 0514 PIIGS

ireland portugal 10 yr yields 0514 PIIGS

PIIGS: Sentiment, deflation fears pressuring bond yields

In addition to Draghi’s strong guidance, Hay chalks up these incredibly low yields to concerns about eurozone deflation and markets that are starved of reasonably priced risk, but that doesn’t’ change what he sees as the likely eventual outcome.

“I don’t question the fact that the ECB is ‘ready and willing’ to be the bond buyer of last resort; it’s the ‘able’ part I can’t swallow,” writes Hay. “That’s because Germany would have to go along with the scheme, and I don’t see that happening other than for token amounts.”

While most of Europe is finally recovering, Italy and Greece continue to lag behind and by many measures are already in deflation. If growth doesn’t pick up soon their debt burdens could quickly become unsustainable, and as soon as market turns against them, bondholders could find themselves competing with Europe’s central banks for consideration as the next deal is hammered out.