The Smart Money Starts To Turn Against Greece

The euro zone’s IMF bailout of Greece has lost its power to attract the world’s capital markets to the debt of the southern European country. The markets, as represented by the spreads on Greek CDS and bond prices, clearly believe now that the odds are strongly against Greece balancing its budget and raising enough money to cover its debt service for 2010.

Greece said it needs to raise roughly 52 billion euros to handle its obligations. Global investors including banks based on euro zone nations may no longer be willing to take that risk.

Scott Mather, head of global portfolio management at PIMCO, the largest manager of fixed income assets in the US, indicated that “Confidence in Greece as a borrower has been badly shaken by a 300 billion euro ($405 billion) debt pile that exceeds the country’s 240 billion euro annual economic output. It has about 23 billion euros worth of bonds — equivalent to almost 10 percent of its gross domestic product — maturing between now and the end of May,” according to Reuters.

If Mather is right, it means that the financing Greece has done so far this year is only the capital markets throwing good money after bad. That means Greece is more likely to withdraw from the euro zone or be expelled, which would almost certainly cause it to default on its debt. That, in turn, may throw the entire region into a credit crisis. It is not clear, however, if the crisis will actually occur. Greece, as a nation economically independent from the balance of the region, may actually have a reverse firewall effect. Some of Europe’s largest banks may have to take write-offs from a default on Greek sovereign obligations, but nations like Germany and France might rather prop up their banks than prop up Greece.

Financial isolationism may have come to Europe and Greece is about to be abandoned.

Douglas A. McIntyre