Greek Fire, Part 11

The Greek Fire continues to burn as talks over the weekend did not resolve the bailout problem.  The Germans want strict debt reduction for Greece before they'll hand over their part of the bailout, and there's no way Greece can really avoid taking on more debt.  Needless to say, this morning Greek bonds collapsed.

Greek bonds tumbled, pushing yields to the highest since at least 1998, on speculation Germany may refuse to guarantee an early release of bailout funds.

The yield premium investors demand to hold the nation’s 10- year bonds rather than German bunds climbed to more than 600 basis points after the Financial Times cited German Finance Minister Wolfgang Schaeuble as saying Greece must firm up plans for deficit reductions in 2011 and 2012, and not just for this year, to qualify for aid. Citigroup Inc. said a reorganization of the debt or need for extra support looks “unavoidable.”

“The market is increasingly nervous the funding will not be in place before the next payments are due,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors. “Germany is playing hardball and until we see the money on the table investors will demand a higher premium to hold the debt.”

The 10-year Greek bond yield jumped 78 basis points to 9.58 percent as of 11:30 a.m. in London. The 6.25 percent security due in June 2020 slid 4.34, or 43.40 euros per 1,000-euro ($1,333) face amount, to 78.86. The two-year yield jumped 300 basis points to 13.96 percent, after soaring the most on record to 14.66 percent.

Greece’s fiscal crisis dominated weekend meetings in Washington of finance ministers and central bankers from around the world after the nation said on April 23 it wanted as much as 45 billion euros of financial support that was made available by its European neighbors and the International Monetary Fund. Dominique Strauss-Kahn, the IMF’s managing director, said talks will end “in time to meet Greece’s needs.”

Germany doesn't want to end up holding the bag on Greek debt, which they know they will should Greece borrow more money and Greek politicians refuse to clean up their act.  Politically they can't: it would lead to mass riots across the country.  Six years ago the country hosted the Summer Olympics.  Now it's bankrupt.

The IMF better hurry up, at this rate the bailout's going to need a bailout.  At best the bailout has to be decided on before the end of next week, or Greece will certainly miss its May payment.  That clock is starting to run out fast.  Such a default would be devastating to the Euro.  But a bailout will be devastating to Germany, because they'd be the ones forking over the money.  The Germans aren't stupid.  They know they're being put on the block to cover a loan for Greece that means in all certainty that they won't be getting paid back.

And investors want a ridiculous rate of return before they'll invest now too.  The spread at one point today was over 600 basis points, which means the difference between a 10-year German bond and a Greek bond is more than 6%, that means a German bond is going for about a 3% yield...and a Greek one is going for well over 9%.  With Germany wanting guarantees itself, the bond market is imploding.  Germany wants to see that kind of return too, after all.  They're likely to see much, much less.

The Greek Fire spreads.