Greece saved itself with its latest austerity measures.  For a few months, maybe.  If you have read about Greece’s woes and read about the bailout and rescue process, the real implication is that Greece has effectively just kicked the can down the road and the worst is yet to come.  To make matters worse, the financial markets continue to shift their focus away and are pointing to far worse things to come in the other peripheral nations in Europe.  In effect, the markets are cutting bacon off of the PIIGS’ back.  Greece is just one PIIGS nation, and now we are seeing more and more about Portugal, Ireland, Italy, and Spain all back under more pressure from government to corporate debt.

Despite an expected rate hike from the European Central Bank, keeping up with international bond spreads all at once is a bit like working on a car tire’s alignment when you are still on the road.  The data is also mixed when you include the so-called credit-default swaps market in the equation.

The WSJ has noted that the Portugal downgrade from Moody’s has only added woes, with Portugal’s two-year bond spread over German bonds now reaching just over the 1,500 basis-point mark.  It was also noted that Spain’s spreads were widening out ahead of a bond auction as well.

Now we have Bloomberg reporting that hedge funds are moving past Greece “with bets on a wider debt crisis.”  The bets are moving in the direction that the sovereign debt crisis will spread to Portugal, Spain and Italy.  Where it gets interesting is that Bloomberg also highlights how bad countries can make for bad corporate debt, and it highlighted Telecom Italia SpA (NYSE: TI) and Portugal Telecom SGPS SA (NYSE: PT) in there.  Italy does not have so many options for Americans to invest in (long or short), but there is the iShares MSCI Italy Index (NYSE: EWI) that closed at $16.97 on Wednesday and its 52-week range is $14.51 to $20.15.

Dennis Gartman, a well-known commodity and currency trader, has opined over and over how this is nothing short of a pre-default.  Now his latest appearance on CNBC calls for the PIIGS to effectively be bankrupt in 18 months. His appearance a day earlier was not just limited to a Greek default being inevitable.

Reuters has also keyed in on the matter ahead of the anticipated rate hike from Europe.  It noted some stability so far in Portugal, but noted rising yields in Spain and Italy.

While not front and center in the news today, Allied Irish Banks plc (NYSE: AIB) is effectively issuing a massive new number of ordinary shares that will keep the shares public but will dilute and dilute away for common holders.  If you read our own “When Wards of the State Leave the Orphanage”then the picture is more than concerning.  Throw in Bank of Ireland (NYSE: IRE) as well.  Allied Irish shares in Dublin hit a new near-term low of 13 cents, with Bank of Ireland also hovering near a low around 11 cents locally in Dublin.  The current plan calls for these to remain public equity entities but they are little more than warrants or way out of the money call options according to most.

Greek banks have pledged to support the Greek government’s pledges, whatever that means.  Traders have been exiting the National Bank of Greece SA (NYSE: NBG) ADRs despite last week’s austerity measures.  Its ADRs closed at $1.35 in New York on Wednesday despite having been at $1.49 just last Friday.

What is interesting is that if you looked at the iShares MSCI Spain Index (NYSE: EWP), you might not think much was wrong by the high ETF price.  After closing at $40.97 on Wednesday, that was down from nearly $43.00 on Friday even if its 52-week range is $33.82 to $45.99.  It is hard to imagine that the ETF closed out 2010 at $36.04, showing that this is actually up more than U.S. markets so far in 2011.  Telefonica, S.A. (NYSE: TEF) and Banco Santander, S.A. (NYSE: STD) appear to heavily dominate that ETF in weightings.

The Ibero-America Fund, Inc. (NYSE: SNF) is equally puzzling, even if it is a small closed-end fund for Spain with about $67 million in assets.  Its shares closed at $7.50, its 52-week range is $5.54 to $7.77, and it closed out 2010 at $6.54.  That one is up about 14.6% to date in 2011 and its fund managers have actually gone as far as approving the liquidation and dissolution of the fund.  The fund’s holders will get to vote on the dissolution on August 31, 2011, but that “record date” cut off has now passed..

There is one other issue we want you to consider here.  A default may no longer have to be a real default, which we have outlined in more detail.  It seems now that even a voluntary selective reworking or extension of terms now counts as a default.  No good deed goes unpunished.

Is it any shock now that the Europeans are routinely accusing the ratings agencies of exacerbating an already dire situation?

JON C. OGG

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