Why the Great Greek Tragedy Has Barely Begun

Today the credit rating agencies have downgraded Portugal's credit down to 'junk status' - imagine how that's going to enhance their ability to pay off their loans.  It looks increasingly as if Italy is the next weak link in the chain - and they are far too big to bail.


I thought this was a good article about the Greek situation and how it impacts on markets.  The graph is pretty revealing!

This is a memorable day for the United States of America, both to warmly celebrate our past and coldly contemplate our future.

But if you want the truth about what’s likely to happen next — in the wake of the Greek tragedy or any other debt disaster — you can’t trust the happy talk of our leaders who are merely seeking to tame the debt monster they themselves created.

Nor can you believe Wall Street Pollyannas looking for any excuse to push the U.S. stock market higher.

The only reliable measure of this debt crisis is the price thousands of institutional investors pay — and are willing to continue paying — for actual insurance contracts to protect themselves against future defaults. The more probable the default, the more they’ll pay.

And for the country that’s at the epicenter of this crisis — Greece —here’s what this measure is telling you, loudly and unambiguously:

Despite the biggest sovereign bailout in history and despite all the happy talk last week about a new infusion of emergency cash, the probability of a Greek debt default is now the highest ever!

Have the bailouts made any difference? None whatsoever!

In fact, based on how much they’re currently willing to pay for the insurance, institutional investors around the world have concluded that the probability of a Greek debt default is FOUR times greater today than it was when European officials announced their giant bailout package.

That’s right. Nearly 14 months ago — on May 12, 2010 to be exact — when the European Union (EU) and International Monetary Fund (IMF) announced a 110 billion euro bailout for Greece, the cost of insuring $10 million in bonds against a Greek default was close to $540,000. Last week, it was $2.3 million, or 4.3 times more!

Think that’s shocking? Then consider this:

Even when Lehman Brothers failed and even when the likelihood of a global collapse was at an all-time peak, the most investors were willing to pay for $10 million in Greek debt default coverage was only $52,000. Today, they’re paying 45 times more!

In other words, the world’s largest investors now believe that the probability of a Greek default is FORTY-FIVE times greater today than it was at the height of the 2008 financial crisis.

Why are so many knowledgeable global investors who establish the price of these insurance policies so pessimistic, even while world leaders and markets are celebrating the “salvation” of the Greek economy?

Because they know that the Draconian austerity package just passed last week by the Greek parliament — higher taxes on entrepreneurs and the poor, spending cuts for seniors and others, and the fire sale of government assets — won’t do a darn thing to help Greece avoid a default on its debts.

They fully understand that these measures will actually hurt the country’s chances for survival in the near term.

They know that each time you raise taxes and cut spending, the economy takes a hits, government revenues go down, and the country finds it even closer to impossible to pay its bills and debts coming due.

Let’s say, for example, that you own a manufacturing company that has fallen on hard times. You can’t make your monthly payments. So you start downsizing — laying off workers and selling off equipment to raise the cash. Trouble is, your debts outstanding don’t shrink by one iota. So unless you can find some new way to generate more revenues, the more you downsize, the more likely a default will be.

You are, in fact, signing your own death warrant.

That’s exactly what Greece is doing now. Worse, it’s piling on still more debt that merely buys a few weeks more time: The much-ballyhooed loans Greece just qualified for will only help it survive for two to three months — through the summer, but not a single second longer.

All This Leaves You with Two — And Only Two — Choices …

  You can believe the same politicians who have consistently and deliberately deceived you about this debt crisis from day one (see also “Government Lying about Debt Crisis“).

  Or you can believe the global investors who have no agenda but to protect their own investments from the true risks.

It also leaves you only two courses of action:

  Believe the politicians, forget about the crisis and go back to the old days of buy-and-hold investing.

  Or, believe the reality of the marketplace and continue to err on the side of caution.

The choice should be obvious: Despite what they may be saying in Athens, Berlin, Washington or on Wall Street … no matter what the media may try to sell you … the handwriting is on the wall: Greece is in the final stages of an historic collapse. Nothing can stop it now.

Not concerned? Think it’s a far-away event that won’t affect you? Then consider this …

The Unfolding Great Greek Tragedy Impacts YOUR Finances in Three Major Ways …

If this were just an isolated financial crisis on the other side of the world, it probably wouldn’t amount to much as far as most Americans are concerned.

But in today’s shrinking, hyper-connected world, the consequences of a Greek default could not be more important to you, me and every other U.S. investor.

In fact, I count no fewer than three major impacts this crisis will have on your wealth and well-being:

IMPACT #1: It will crush U.S. banks. It’s no secret the real estate crisis is back — falling home prices, a tsunami of home foreclosures and more. And despite short-term rallies, it’s virtually impossible to envision a scenario in which bank earnings are not adversely impacted.

This is why bank stocks took such a big hit in May and June. Wells Fargo, for example, was flying high near $34 per share. Then, without warning, it suddenly plunged 24% — to $26.

Bank of America hit $15 per share and then plunged more than 30% — all the way down to $11 per share. And nearly every major bank — JPMorgan Chase, Regions Financial, and others — show the same pattern.

But here’s something that not everybody knows: Those same U.S. banks have loaned huge amounts of money to European banks.

And because those European banks have, in turn, loaned billions to Greece, they will be among the first casualties of a Greek default.

IMPACT #2: U.S. money market funds: Did you know that U.S. money funds have invested half of their $1.6 trillion in assets in European banks?

It’s true: And 50 million Americans have money in those funds!

That’s not good news. When Greece defaults on its loans, many European banks will find it impossible to repay what they borrowed from U.S. money market funds.

That could force many to “break the buck” — allow their shares to fall in value below $1 each. Even the worry that it could happen can cause the financial markets to freeze and send investors stampeding to withdrawal money.

Impossible? Absolutely not! That’s exactly what happened after the collapse of Lehman Brothers in 2008. One fund that owned Lehman debt, the Reserve Primary Fund suffered mass withdrawals, which, in turn, caused a run on many other funds.

Last week, even the eternally oblivious Fed chief Ben Bernanke fretted publicly about the stability of U.S. money funds:

“They do have substantial exposure to European banks in the so-called core countries: Germany, France, etc.,” he said. “So to the extent that there is indirect impact on the core European banks, that does pose some concern to money market mutual funds.”

Many investors aren’t waiting. In the last two weeks, they have withdrawn $45.6 billion from prime money market funds, according to data from the Investment Company Institute.

But the risk goes beyond just money market funds. After the Lehman panic in 2008, virtually the entire global market for short-term debts — especially corporate IOUs called commercial paper — froze up.

Without the Federal Reserve stepping in to make massive, blanket guarantees, thousands of companies could not have borrowed — even to roll over debts coming due — no matter how good their credit rating. We would have seen a chaotic chain reaction of defaults.

This is the kind of SYSTEMIC risk that caused Washington to throw $700 billion in TARP funds at the problem last time around. But this time, with Congress vowing never to do such a thing again, there is no safety net.

The consequences could be catastrophic.

IMPACT #3: Washington is suffering from the same debt disease as Athens. Yes, in Greece, the illness is more advanced. But including government agencies like Fannie Mae and Freddie Mac, the U.S. government, like Greece, has passed the critical danger threshold of more money tied up in debts than the entire economy produces in each year! (A debt/GDP ratio of over 100%.)

Indeed, nearly everything you’re seeing in Greece right now:

The huge cutbacks in government spending on seniors …

The substantial tax increases — not just on “the rich,” but on every portion of the population …

The soaring interest rates and unemployment …

Even the protests and riots …

Are little more — and little LESS — than a sneak preview of what could be in store for us right here in the States, barring a major miracle in Washington.

For rest of article, go here