Game Over? Senior IMF Official - "I Expect A Hard Greek Default This Year"

While the US was panicking over a double zero jobs report, things in Europe just fell off a cliff. As both the WSJ and Reuters report, it seems that the second Greek bailout, following repeated and consistent disappointments by Greece which has resolutely refused to comply with the terms of its fiscal austerity program, has just collapsed.And with the US closed on Monday: long a counterbalance to European risk pessimism, this week (especially with the news fro the latest FHFA onslaught against global banks) may just be the one that "it" all comes to a head. But back to Europe, and more specifically Greece, which it now appears is doomed. "I expect a hard default definitely before March, maybe this year, and it could come with this program review," said a senior IMF economist who is keeping close tabs on the situation. "The chances for a second program are slim." It is not only Greece - Italy also thought it would sneak by with getting quid pro no and continue leeching off of Europe, or specifically Germany, indefinitely, at least until the ECB said that absent Berlusconi taking austerity seriously that implicit ECB support for Italian bonds would be yanked, sending the second most indebted country in the world into a toxic debt tailspin. And so it comes that after 2 years of waffling, Europe finally realizes that the piper always eventually gets paid. Alas, it is now far too late.

From the WSJ:

Talks over new bailout funds for Greece were suspended Friday amid disagreements over how to fill a government-deficit gap that once again is veering off track, raising doubts about the country's future access to finance and triggering renewed nervousness in financial markets across Europe.

The suspension pushed yields on Greek government debt to levels indicating that investors see a default by Athens soon as a near certainty: Interest rates on one-year paper blew out past 70% and two-year yields rose close to 50%.

The continent's stock markets also retreated, with the French market down 3.6% and the German market down 3.4%.

The suspension of the talks in Athens between the government and a group of officials representing the providers of Greece's bailout cash came, officials said, amid a dispute about how to address new gaps opening up in the government budget deficit.


"The Greek side insisted the missed targets are the result of the recession. The troika said recession played a part, but Greece basically didn't keep up with its commitments, so more measures will be needed to make up for the lost ground," said a person with direct knowledge of the talks.


"There is a clear disagreement that can't be bridged today," the person added.

Will it be bridged in mid-September, and is a market and EURUSD crash all that will take, as has been the case constantly? We will find out soon, although it increasingly appears improbable...

"I expect a hard default definitely before March, maybe this year, and it could come with this program review," said a senior IMF economist who is keeping close tabs on the situation. "The chances for a second program are slim."


Failure of Greece to meet its targets, growing reluctance by some euro members to continue lending and the fact that private-sector participation in a second bailout won't significantly alter Greece's debt profile are the primary factors, the IMF official said.

It gets worse: as Reuters confirms, the political turmoil has already spread to Germany, where all that is needed for wholesale conflagration that will sweep Merkel out of the cabinet is a tiny spark. This may just have been it:

Christian Lindner, general secretary of the Free Democrats, (FDP) junior coalition partners in Chancellor Angela Merkel's center-right government, said Athens was endangering European solidarity.


"The breakdown of talks between the Troika and Greece is a blow to the stability of the euro," he said at a news conference in Berlin.


Referring to Greece's failure to meet deficit targets set in exchange for a second bailout package, Lindner said Athens was shirking responsibilities to which it had agreed.


"This is not about non-binding statements of intent, but contractually secured reciprocity for the emergency loans," he said. "We insist these agreements are observed."

Goodbye Greece:

Separately, senior FDP official Hermann Otto Solms, a vice-president of the Bundestag and an economy committee member in parliament said since Greece could not handle its debt problem and it should consider leaving the euro.


"It should be considered whether a restructuring and exit from the euro would offer better perspectives for the currency union and Greece itself," he told Frankfurter Allgemeine Sonntagszeitung.


The pro-business FDP styles itself as a defender of the German taxpayer, a stance Lindner reiterated in his statement over Greece.


"Taxpayers in Northern Europe and especially Germany cannot accept inability or reluctance. In the eyes of the FDP, Greece must reaffirm its will for stability and reform."

Alas, a Greek departure from the Eurozone, which now seems inevitable, will have a major impact on Europe's financial institutions. This is, however, not news to the market, which over the past few days, has sent not only the Libor-OIS spread to 70.6 bps (up 5bps overnight), or its widest level since April 2009, but has pushed Libor higher for 28 consecutive days - the longest stretch sine 2005, to its highest since August 19, 2010. Furthermore, the spread between the minimum and maximum 3 month USD Libor as self-reported to the British Banker Association, has hit a 2011 wide.

So is the worst bank some derelict husk of toxic assets like Barclays and RBS? Yes... RBS is certainly #2 in the top three highest reported Libors, or institutions that find it most difficult to procure USD funding. So who are the other two most troubled banks: SocGen? BNP? Bank of America? Nope...

That's right: CSFB and UBS. It appears that in a parody of Biblical allegory, the first shall indeed be last, as what was once a bastion of liquidity and solvency, Switzerland and its indomitable banks, is the first to topple should Greece finally be kicked out.

And should the two biggest Swiss indeed banks go out with either a bang or a whimper, then, well, all bets are off.