Germany Wants 50% Default for Greece

From Zero Hedge:

…the debt rollover plan has imploded and means that the entire Greek bailout has collapsed as some had expected. And now that it is clear that contagion is threatening to sweep through the core, it is back to Germany to prevent the gangrene, no longer contagion, from advancing beyond the PIIGS. However, in order to prevent a full out revolution, Germany’s economic elite has said it would agree to an EFSF expansion and hence installation of European firewall, but at a price: a “controlled” default by Greece and 50% haircuts for private bondholders (as German banks have long since offloaded their Greek bonds).

This means that “Lehman” is indeed here: just like back in 2008 Paulson et al thought they could contain the adverse effects of a Lehman bankruptcy, while the financial system ground to a halt 4 days later when money market funds broke the buck, so now Greece is somehow expected to remain in the eurozone even as it files bankruptcy…

The bottom line appears to be that the Europeans need to come up with $2 trillion to keep their financial system afloat – that is, to keep the bad news confined to the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and keep it out of France. What Germany seems to want – and it is reasonable – is an end to the Greek problem.  That if this is going to happen, it happens once and for all.  The Greek bondholders lose 50%, Greece gets bailed out…and hopefully Greece manages to get its finances in order sufficiently to service the rest of their debt.

The trouble is whether or not bailing out Greece – even with a 50% “haircut” for bondholders – will really do the trick.  Greece is pretty small potatoes as far as the Eurzone economy goes.  Looming gigantically larger are Spain and Italy.  As far as I can determine, both of those nations are already fundamentally bankrupt and cannot rely upon the private economy to service their debt as their bonds come due.  The only entity out there with the willingness to heavily purchase Spanish and Italian bonds would be the European Central Bank, or whatever financial bail out structure the Europeans come up with.  And where does the money come for that? From the Germans who will have already bailed out Greece and have no spare money left?  From the European Central Bank printing up a bucket of money?  Where?

It is the lack of real money – someone out there with trillions not already committed to some other enterprise – which makes me figure all these efforts to avert collapse are meaningless in an economic sense.  In a political sense, they may help the Ruling Class (European and American) ride out the political storm now through 2013.  The cost will be enormous, but such things never disturb people who are rich, in charge and determined to stay that way.


Watching the Euro Crisis

Mish notes that Greek 1 year bonds have hit 108% – meanwhile, over in Italy (from Bloomberg):

Italian bond yields surged at an auction today and Greek Prime Minister George Papandreou failed to reassure investors that his country can avert default as the euro region’s debt crisis worsened.

Italy sold 12-month bills today to yield 4.153 percent, up from 2.959 percent a month ago as demand fell…

I seem to remember Greek 1 year bonds being something like 4 or 5% a year ago…this is an economic model starting to unravel.  And it is kind of hard to keep a lid on it when you read stories from Europe of plans for an “orderly default” for Greece.

Could be a very wild, financial ride this week…

UPDATE:  Greek 1 year bonds reach 139%.