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THE GREEK DEBT CRISIS TOOK ANOTHER STEP closer to a restructuring or outright default as yields on the Athens government's two-year notes soared past 11% Thursday after Moody's lowered the debt-laden nation's credit rating to single-A3 while retaining its negative outlook.
Those market's assessment that Greece's fiscal situation was untenable was confirmed Friday morning after the Athens government requested to tap the nearly $60 billion aid package from the European Union and the International Monetary Fund.
Meantime, the yield on the 10-year Greek bond topped 9%, nearly three times the 3.05% yield offered on the benchmark 10-year German bund. In the credit-default swap market, the cost to insure Greek debt for five years surged to 650 basis points, up 165 basis points from Wednesday's close, according to Markit. (That's equivalent to $650,000 annually to insure $10 million for five years.)
Following Friday's news that the Athens government would tap the EU-IMF bailout package, Greek CDS spreads came in sharply, to 560 basis points, according to MarketWatch, also citing Markit data.
For the very shortest maturities, however, yields remain suppressed by the knowledge that bailout funds are at the ready to meet current obligations. As "Tyler Durden" at Zero Hedge points out, a big chunk of the bailout money from the International Monetary Fund would come from American taxpayers. And, of course, German taxpayers are bristling at the prospect of providing to Greece annually equivalent to 10% of what they paid for unification after the fall of the Berlin Wall.
The question that constant readers of this column must be asking is why should anybody outside of Europe care about Greece's travails. That echoes similar questions about the U.S. housing market in 2006 and 2007, which then seemed to get hashed over ad nauseum in this space.
As for Greece, "The answer â?? unhappily -- is 'yes,'" according to Uwe Parpart, chief economist and strategist for Cantor Fitzgerald.
"Greece has vastly overspent to avoid dropping deeper into economic crisis. With recovery slow to non-existent, future revenues won't pay for debt-service obligations, not in the next several years, perhaps never," he writes in a research note
Much of that overspending has been paid for by borrowing from the rest of Europe, which complacently assumed that lending to another nation in the eurozone posed no risk. Since devaluation was out of the question, as in the bad old days of drachmas, lire and pesetas, banks and others in the "core" countries of Germany and France eagerly bought the bonds of the "periphery" countries such as Greece, which paid a higher yield with no apparent risk.
But also in those bad old days, external imbalances were self-limiting. When they got out of hand, the markets ran away from the currencies of the profligate, forcing devaluations and the hard choices to put the profligates' houses in order.
Given that devaluation was, by definition, impossible in the eurozone, lending across borders boomed and aided and abetted fiscal and current-account imbalances. This was much the same as the credit excesses in the U.S. mortgage market, where investors plunged head-first into triple-A-rated residential mortgage-backed securities whose gilt-edge rating was at the end of the day based on the expectation that house prices only went up.
So, what's next? Cantor's Parpart thinks the markets are forcing the hands of the IMF and foreign governments.
"At current yields, for Greece to raise money through bond issuance is absurd," he writes. "The EU and IMF can rapidly implement the â?¬45 billion loan agreement reached on April 10. Or they can provide an emergency bridge loan and wait and see.
"The market now expects a Greek debt restructuring (de facto default) rather than full-scale bailout, which would throw vast amounts of good money after bad. That's probably the best interim solution. In the longer run it still solves nothing. From an overall economic standpoint, Greece makes Argentina look real good."
But don't feel too smug. "Greece is just the extreme case. The U.S., Japan, and the U.K. (to name just three) are barely better off. Debt threatens to devour future growth," Parpart concludes.
For the time being, however, global capital is likely to continue coming to America, bolstering the dollar and Treasuries.
Comments: randall.forsyth@barrons.com
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