Greek Fire, Part 32

The world markets are beginning to expect a Greek default and a breakup of the eurozone.

World stocks hit a three-month low on Thursday, the euro tumbled and top-rated government bonds rose as investors began to price in a possibility of disorderly default in Greek sovereign debt.

Euro zone and banking sources told Reuters Germany wants to delay the deadline for a second Greek aid package to September, reflecting disagreement within Europe on how to involve the private sector in a deal without triggering a default.

Political turmoil within Greece is also intensifying fears. Parliamentary resignations threw the Greek Prime Minister's plan to reshuffle his cabinet and seek support for an austerity package into disarray.

A Spanish auction suggested problems might spread. Weak demand prompted investors to push the country's 10-year yields to an 11-year high. The cost of insuring sovereign debt in Greece, Ireland and Portugal against default hit record highs.

Greek bonds are essentially bidless today, the spread between Greek and German debt approaching an absurd 20% or more.  Nobody's buying.  Liquidity is locked up tight.  We're finally seeing the European Bear Stearns moment.  The Greek Fire is about to spread to the rest of the PIIGS nations.

Besides worrying about a potential Greek debt restructuring, and the repercussions for European banks that hold the country's bonds, markets also fear that global economic growth momentum is slowing just as the Federal Reserve prepares to end its $600 billion bond buying program.

All this is prompting investors to unwind their risky assets going into the thin trading of the summer months.

"There's political turmoil in Greece, and the government doesn't look too stable," said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.

"The risk is increasing that Greece may not get a bailout, and this is putting pressure on the euro."

Germany's playing it cool, trying to pretend the problem isn't Greek citizens aren't going to pay for another bailout of the Greek and European banks.  The reality is the Greeks aren't going to accept any more austerity to keep the bankers happy.  It's over.  The government has all but collapsed.

So where do we go from here?  Should the Greek government go under, then what?  More importantly we're seeing a mass shift away from sovereign debt in the eurozone right now.  People are getting out of the market as it looks increasingly like Greece will exit the eurozone and the euro currency and be left on its own.

It's the European banks who are going to take it in the shorts if that happens.  Hang on, folks.  This just got real.