PIIGS Fly As Greek Rescue By Germany Contemplated

Tyler Durden's picture

Yet another rumor denied vehemently by the Greek Finance Ministry, which automatically means it is 100% true, is that Greece rescue talks are reaching a fever pitch, and according to FT-Deutschland, Germany is seeing increasing pressure to bail out the struggling country. As Dow Jones reports "rescue talks are being held in the EU and with certain capitals about aid for Greece, according to the sources, the report adds. Several options are being discussed, one of which being bilateral loans from some euro zone countries, where Germany would have to shoulder a major part as the euro zone's largest economy."

Other potential options include various direct public and private funding ideas:

Other options are premature payments from the cohesion fund or credit lines from larger development banks like Germany's KfW or France's Caisse des Depots, according to the report.

All this is occurring as PIIG spreads are now firmly wider than BRICs:

As Credit Trader points out:

PIIGS (on average) are nearing their all-time widest levels from Q1 2009. Interestingly, the relationship between developed economies and emerging economies sovereign risk is comprerssing dramatically which we believe is a cyclical issue that will leak contagiously over to the EM sovereigns if pain becomes very sharp in the majors.

Also of note is the fact that Greek govvie bonds are the only ones of the majors to trade wide (relative to Bunds) of CDS (a negative basis) while the rest of the PIIGS all trade tight in CDS to Bond spreads. This basis is compressing (as it should as it is a juicy trade) but it certainly looks like real money is leaving riskier govt bond markets.

Regardless of how a bearish bias is expressed, with GGB 10 year yields surging, and buyers of the recent bond issue already underwater, we question how eager private funds will be to fund yet another Greek bond issuance. Furthermore, should the basis collapse even more, cash spreads will leak even wider, possibly further complicating the technical risk picture, as an onslaught in CDS will force even more short CDS positions to cover.

It appears that Angela Merkel is now stuck between a rock and a very hard place, courtesy of her desire to placate American desires for the past year to keep a strong euro. This decision will likely result in a very destabilizing impact on the eurozone as the ECB gradually realizes the only recourse at this point is to take the Fed head on in the game of currency devaluation. What that means for US stocks is more than clear.