Greece

As one so vividly remembers, probably the key catalyst that set off the chain of events last fall following the collapse of Lehman were the closed loop (and much delayed) downgrades of AIG, which in a span of hours went from AAA to much lower, thus springing various collateral requirements which the company could not satisfy, and in turn forcing even more downgrades, until ultimately it became clear that the firm (like most others on Wall Street) is merely a lot of hot air and unjustified valuations. Ironically, the rating agencies, and more specifically Moody's, could once again be the catalyst for the much anticipated collapse of the European house of cards, which as all now know, has Greece as its weakest link. The threat: a Greek downgrade by Moody's from its current rating of A1 to anything with a B handle would make the country's sovereign debt ineligible for ECB collateral in 2011, sparking a sovereign liquidity crisis. Recall that both Fitch and S&P recently downgraded Greece to BBB+, implying that the fate of Greece, and specifically its ability to access cheap and quick capital via the ECB, could be cut off on the whim of the rating agency that Warren Buffett himself can't stop selling enough of.

Greece 5 Year CDS up 28 to 269 bps. The all time high for the country was on January 20 at 292 bps, which was before Bernanke decided to have US taxpayers bailout the world.

Update: S&P just slashed the banks which Citigroup Crameresquely tells its clients to Buy, Buy, Buy.

How big a deal is Greece? Potentially real big. This story has all the pieces for something to get out of control. If the potential for chaos exists, the markets tend to gravitate towards it. Every day we seem to get a bit closer.

More bad news for a troubled Greece. More bad news for a troubled Greece. And all this happening even as finance minister George Papaconstantinou says that Greece "is not banking and not operating under the assumption" that the Hellenic country will be bailed out by its Eurozone neighbors. He has certainly studied the Dick Fuld script well.

Developing story as highlights from George Papandreou's speech become available. Some notable snippets include his desire to cut deficits below 3% of GDP by 2013 (good luck), a cut in debt sovereign starting in 2012, and, most notably, a limitation on banker bonuses in the form a 90% bonus tax.

More headlines: Greek PM says will privatise companies not essential to the state, will proceed with state asset sales

Today at 7pm, Greek Prime Minister George Papandreou will address “the economy, the productive model, the credibility of the state mechanism, the confidence of our European partners and, above all, the daily life and prospects of Greeks." The reason for this extraordinary measure (keep in mind this is Greece, not D.C., where the president provides hourly updates on the latest BLS releases) is the recent plunge in Greek stocks and government bonds, and culminating with several rating agencies either downgrading the country (Fitch) or putting it on downgrade review (S&P). Most recently, the yield on Greek 10 years hit 5.295% on concerns the country's fiscal deficit of 12.7% will makes its already extreme leverage even more unmanageable. And the biggest wildcard: the massive reliance of Greek banks on ECB repos backed by potentially soon to be much lass valuable government debt.

Some thoughts on where the Greece story may go. Two possible outcomes. They both have significant impacts.

Spreads ended the day mixed in the US today with very low intraday ranges and only marginal moves as HY just outperformed IG. Breadth was modestly negative as TMT and CONSumer names underperformed. We note that credit has outperformed equity in the last couple of days as the dollar has sprung higher and perhaps this is another of the coal-mine's canaries that risk-aversion (think steam behind the run) is hitting stocks.

Greece was placed on Creditwatch with Negative Implications by S&P, noting that the country's A- rating may be cut within 2 months. Greece CDS has widened by 11 bps to 194 on the news, and Greece now accounts for 19.7% of all SovX risk currently.

Contagion effect is spreading as the weakest link in the Eurozone catches fire.

Well, can't say we didnt see it coming. Portugal was downgraded with impunity by S&P from AA- to A+ on the belief that "the government's structural reform measures relating to the economy and public finances have proven insufficient to bring about convergence with the 'AA' peer group." And what a high quality peer group it is.

Well, can't say we didnt see it coming. Portugal was downgraded with impunity by S&P from AA- to A+ on the belief that "the government's structural reform measures relating to the economy and public finances have proven insufficient to bring about convergence with the 'AA' peer group." And what a high quality peer group it is.

The biggest threat to the U.S. Obama rally and the miracle recovery proposed by Democrats in the $825 billion bail out package may possibly reside about 6,000 miles away in Greece.

The biggest threat to the U.S. Obama rally and the miracle recovery proposed by Democrats in the $825 billion bail out package may possibly reside about 6,000 miles away in Greece.

The biggest threat to the U.S. Obama rally and the miracle recovery proposed by Democrats in the $825 billion bail out package may possibly reside about 6,000 miles away in Greece.