Why Market Is Now More Certain Than Ever That Greece Will Default, And A European Funding Update

Tyler Durden's picture

One of the stealthier developments over the past months has been the ever wider creep in Greek CDS, especially in the longer-dated part of the curve. In fact, everything to the right of the 3 Year point is now wider than it was both on the eve of the Greek semi-default, and just after the announcement of the European Stabilization Mechanism (ESM). How is it that with so much firepower, better known as free money, thrown at the problem, have spreads not declined? The CFR provides one interpretation, which speculates that once European banks find a firmer footing, that Greece, with the blessing of Europe proper, will be allowed to finally sever its mutated umbilical cord, and default. The catalyst would be Greece getting its primary deficit under control, at which point ongoing bad debt funding would no longer be necessary. Of course, this hypothesis is based on two very critical assumptions: European banks, especially in the periphery, as the second attached study from Goldman indicates, are still locked out. To think that Europe will be able to get to an equal footing for all countries seems like some wishful thinking at this point, especially if the market does consider the implications of what a Greek default will do to peripheral banking. Additionally, the ramifications to the euro in the case of a default will be dire, although that may be precisely what Europe is after all alone. Regardless, that is how the CFR sees things, rightly or wrongly. Keep an eye on Greek spreads in the coming weeks to see if the theory is validated.

From the CFR:

The difference between Greek and German government bond yields can be used to estimate the market’s view of the likelihood of a Greek default. The chart above shows these probabilities over different time frames on three different dates. On April 30th, no European plan was yet in place to address the ballooning Greek debt, and default was considered a real possibility in the short term. On May 11th, just after the European Stabilization Mechanism (ESM) was announced, markets sharply cut their view on the odds of default across all time horizons. However, the market’s analysis of the ESM has become much more nuanced since then. On September 1st, the market’s view of the probability of default within two years was lower than before the ESM was announced, but higher over longer time frames.

Greece will happily borrow from the ESM to avoid having to close its primary deficit (that is, excluding interest payments) too rapidly. Yet if Greece is successful in eliminating its primary deficit, its temptation to default will actually grow, as it can wipe out huge amounts of accumulated debt without any longer needing the financial markets to fund current expenditures. If faced with the choice between paying Greek debts and letting Greece default, its northern neighbors may, once their banks are on more solid footing, find it more attractive simply to let Greece default. This is the story line that the markets are now pricing into government bond spreads.

And for those seeking an update on European funding, here is Goldman with: "ECB’s bank liquidity stays on max, periphery needs it most."


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Goldenballs's picture

If you can,t survive until hyperinflation saves you just default.

Sudden Debt's picture

you really think hyperinflation will save you?!

1. This tells me your flat broke, live in your parents basement and you're about 35 to 45 years old.

2. Hyperinflation will turn suckers like you in to even bigger bums then you already are.

There isn't such a thing like a get out of jail free card.

MichaelG's picture

Even though it's all Monopoly money anyway? Drat. (Actually, notes issued by Parker Bros. are probably a safer store of value than the €, £, ¥, & $ at this late stage...)

Goldenballs's picture

A) Don,t live in Greece. B)Couldn,t be further than the truth. C)Hyperinflation is what will occur,hope you,ve got Gold D) Have a nice day.

MichaelG's picture

Oh, Raging-Gif is gilded, don't be concerned on that score. I am a little worried D) wise; apropos de rien, I keep thinking of this Simpsons quote:

Moe: Oh, hey, Homer. You're looking unusually focused this morning.

Hope you're OK, SD.

Larry Darrell's picture

Call me slightly jealous, but it seems that soon the more stable Eurozone countries will be able to drop Greece like a (for its) bad [fiscal] habit(s).....


I still pray daily that we here in the US can do that with our failed states (CA, IL, NY, etc)

101 years and counting's picture

Letting Greece, Spain and Portugal all eventually default allows several things.  The Euro plunge will help Germany's exports.  The Euro plunge will kill US equities.  US Equities at much lower prices allows QE2 to come into play.  And, the pres gets to "save face" by blaming Europe on the US's double dip.

Just my thoughts.....

ZeroPoint's picture

I wonder if European investors will flock to treasuries now?

I guess it will become of question of who lie you believe most - the dollar or the euro.

Spitzer's picture

I think default is going to be allot calmer then everyone thinks and eventually it might become more favorable.

Eternal Student's picture

Perhaps for the people doing the defaulting. If I was holding the debt, I wouldn't be calm at all. And God only knows what kind of leverage is built on top of this.


Sudden Debt's picture

I think you mean common instead of favorable.

traderjoe's picture

A default by one will be followed by a run on the others. Once it is deemed possible, bond holders will rush for the exits on the others. And countries, especially ones like Ireland, will be stocked with citizens not interested in living forever in austerity to pay back the bankster's debt. Not at all calm...

Goldenballs's picture

Totally agree,the banks were private entities with shareholders,who should take the risks,once it dawns on the general public that things will not get better for a long time due to paying private banks debts the fun will begin.The banks should have gone bust,full stop, the agony is just carrying on because no one has the balls to do it.They are bankrupt Zombies.

taraxias's picture

Greece will default because it's sliding into a deflationary depression which will result in social unrest, probably as early as this fall, NOT because the EU "will bless it" as Greece "gets it's deficit under control".

Big difference.

MacedonianGlory's picture

Inflationary depression is what is happening in Greece

taraxias's picture

Inflation in the things they need, deflation in their salaries, pensions, homes, stocks, etc

MacedonianGlory's picture

this is covered hyperinflation

Getagrip's picture

How about dentist's?.... 

MrTrader's picture

Greece default ? What are you dreaming at night? The great Greek people of the Republic of Greece still holding 216.5 billion euros in deposits at Greek banks. Yeah, I know, that´s more than what they owe the EU and IMF. Hey, I have a smart idea: why do the great Greek people do not finance their government themselves ? This would be funny ! Simply confiscate all Euro deposits. He, he...:=)))

MacedonianGlory's picture

10 months ago the amount was about 25B higher

Freebird's picture

Sounds about right. 25B into gold, Switzerland & London real estate.

Goldenballs's picture

Its not a question of if Greece defaults but when.A lot of smug characters on here don,t seem to realise the domino effects will mean other defaults and political disintigration,which I,m all for as the EU is a joke.

zhandax's picture

The only thing which will cure the economic malaise of our time are defaults and political disintigration.  Globally.  Bring it on.  Us 'smug characters' are waiting.

MrTrader's picture

This is very understandable. Of course some smart money is fleeing the country or why do you think the German 10 year yields are at multi year lows !? Fact is Greece individuals and corporates have STILL over EUR 200 billion in deposits. Let me throw into the discussion the following wikipedia article :


Therefore, an aggressive campaign was created by Secretary of the Treasury William Gibbs McAdoo to popularize the bonds.[4] The government used famous artists to make posters, and used movie stars to host bond rallies. Al Jolson, Elsie Janis, Mary Pickford, Douglas Fairbanks and Charlie Chaplin were among the celebrities that made public appearances promoting the idea that purchasing a liberty bond was "the patriotic thing to do" during the era...

VK's picture

Isn't the CFR one of the elite's power groups? Just like the Bilderberg, for them to issue something like this is suggesting that the next domino to fall is well underway - The Eurozone is in their cross hairs.


The CFR is for lower ranking members of the NEW World Order. The only members of the CFR who count are the leaders. They issue marching orders for the rank and file chumps. The CFR has thousands of members and probably tens of thousands of former members. There are many CFR affiliated organizations all over the world. Also, there are many “junior” CFR organizations here in America:


StychoKiller's picture

Not to worry, O'Brien told me that:  "We will meet again where there is no darkness."

Calmyourself's picture

Hey GB,

Tell me more about this get out of jail card called Hyperinflation..  That means I can pay my mortgage with funny money right..  The feds would never trade out some fiats or outlaw all transactions over $xxx except for TBTF's...


Tell me more, please.  I am tired of scrimping and working..

edotabin's picture

So this bring me back to my initial question:

Unless they cut the cancer (periphery) out of the Eurozone, how can the $ fall victim to hyperinflation?  It just seems they are bouncing the bad news back and forth between the US and Europe trying to create a soft landing. Inflation is definitely eating away at us in the interim but its not as if the $ is falling off a cliff.

Opinions to the contrary welcome.......





MichaelG's picture

You're right, but inflation/deflation is one thing (except it isn't, when you have i-tion in half the economy & d-tion in the other).  'Hyperinflation', though, is just unfortunately named, and happens to share 9 letters with something it doesn't stem from nor relate to.  It's also less controllable and less understandable: a complete failure of faith, basically. But you're in the right place - 'search this site' (top right) for 'hyperinflation Lira' (the writer, not the defunct* Italian currency), and you'll see plenty of discussion of all three.

*For now.  If they bring the actual lira back, we'll know we're properly effed.

ex VRWC's picture

The money quote is in the attached report, regarding Spanish banks:

An important new development was the introduction of the clearing of Spanish government debt by the LCH, a central clearing house, which allows for increased use of Spanish government bonds as collateral to raise rates at rates below the ECB...


Here is an SEC order granting LCH Clearnet an exemption from SEC rules regarding CDS exchange:


Here is an article discussing how clearing houses are competing to back up Fannie and Freddie:


Here is where LCH.Clearnet received a takeover offer from TBTF banks:


Good overview on the risks, with some money quotes from Gillian Tett:



So what do we have - the next, international AIG in the works, something politicians do not understand that banksters will tell them will resolve all their problems, a magical guarantor of unpayable debts such as Spanish government bonds, Fannie/Freddie, etc.  And TBTF banks with implicit guarantees from governments want to own the action.  Governments guaranteeing their own debts, through a clearing house that cannot possibly back them up.

And this is a 'stabilizing' development for the Eurozone? - Hardly.  Its a destabilizing development for everyone.



tom a taxpayer's picture

ex VRWC - Thanks for this news and detailed scoping of this issue. Very interesting, and frightening. The moral hazards created by the central banks now allows the big banks to rob taxpayers in broad daylight with no fear.

cnbcsucks's picture

Just keep watching the assholes on CNBC and everything will be just fine.  Close your eyes, click your heels three times and say, "There's no place like Englewood Cliffs, There's no place like Englewood Cliffs..."


Josephine29's picture

This issue keeps returning inspite of the fact that EU and IMF officials keep telling us that everything is ok. I notice that the  IMF has produced a staff paper which tells us that sovereign default is “unnecessary, undesirable and unlikely”.

However I notice that as well as updating us on the new poor retail sales figures in Greece notayesmanseconomics has five criticisms of this analysis and feels that

"In the end the real problem is that the world is dynamic and unpredictable and unless there is a quantum leap forward in mathematics the equations used in economics do not represent this adequately at all. "



Tense INDIAN's picture

yes we all know it will default....but when......?????

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