The news started today with S&P downgrading Greek bonds to junk. It wasn't just the sovereign debt that became junk, but also the debt of many of the major Greek banks as well.
This dramatically increases the risk of default because junk rated bonds cannot be swapped for Euro-backed bonds, and this has markets very worried.
Investors in Greek bonds may get back between 30 percent and 50 percent of the value of their holdings should the government default or restructure its debt, S&P said.
Goldman Sachs is predicting an outright default by Greece.
The latest trouble started last Thursday, or what Greek bond traders are referring to as "Black Thursday". That's when the Greek government revised their national deficit numbers higher for the second time in less than a year. Considering that this wasn't ongoing numbers, but numbers that had already been reported to the markets months ago, these lies were too much to take.
Eurostat, the European statistics agency, raised its estimate of the country’s budget deficit for last year to 13.6 percent of gross domestic product, above the Greek government’s recent estimate of 12.9 percent. The ratio of debt to G.D.P. stood at 115.1 percent, compared with the government’s estimate of 113.4 percent.
Eurostat also expressed "a reservation on the quality of the data reported by Greece"...
That suggested that the agency could increase its estimates even higher — by 0.3 to 0.5 percentage point for the deficit, and by five to seven percentage points for debt-to-G.D.P. measure.
The yield on a two year Greek note is nearly 19%, a completely unaffordable level that effectively locks Greece out of the global debt markets. The only alternatives left for Greece are bailout or default.
There are two problems with bailing out Greece.
The first problem is that it is unlikely to be the last Greek bailout.
(Reuters) - It would be logical that the EU/IMF aid for Greece amounts to some 80 billion euros ($107 billion) over the next three years if the mechanism is triggered, a senior finance ministry official said on Sunday.
"40 billions for 2010 is part of a bigger amount for the three-year period. A logical amount for the three-year period would be double than 40 billion," the official told reporters.
Without the first bailout in place, Greece is already sizing up the next bailout. That's bold.
The second problem is that Greece would simply be the first country asking for a handout.
The race to get money out of Greece has become a self-fulfilling crisis. The Greek stock market has dropped 22.7% y-t-d and crashed 7% just today.
Like most financial crisis, it spills over borders.
Portugal's debt was also downgraded today from A plus to A minus. In response, the spread between German bonds and Portugal's bonds reached 5.51%, this highest since the creation of the Euro.
Lisbon's stock market plunged 5% today and is down more than 15% y-t-d.
The contagion is already being felt in Spain, where the stock market dropped 4% today, and is down 12% y-t-d.
A senior Lisbon banker said: "The problem is not Portugal itself, which is in a much better fiscal position than Greece, but the possibility that the Greek crisis could spread by contagion to Portugal and then, much more seriously, to Spain."
Spain has a much larger economy than Greece or Portugal. If Spain were to collapse the entire Euro monetary system would probably collapse with it.
Concerns about the future of the Euro caused it to fall against the dollar today after Germany's FDP hinted that Greece might have to temporarily leave the Euro.
The words "sovereign crisis", once only whispered, are now being spoken openly.
"The biggest risk now is that the market speculates against every single indebted peripheral country, and that could lead to a sovereign debt crisis," Botte said in an interview. "The contagion risk is real. It’s much easier to bail out a bank than to bail out a country."
Of course bailing out those banks is what got us to this point.
The big winners from this all this turmoil are treasuries and gold, which is increasingly viewed as an alternative currency.