Greece Sliding Towards Oblivion

Given the time-honoured trend of bailouts and deals being made during the two day respite from the whims of the markets (also known as the weekend) I was quite surprised that no meaningful news regarding the progress of the Greek bailout was released on Sunday night.  Late last week Greek PM Papandreou formally requested aid and the EU and IMF representatives finally arrived in Athens after being held up by the European resulting from the volcanic eruption in Iceland.  I consider this (lack of news) to be very bad news, and it appears the market agrees with me.  Greek bond yields have exploded (see images below) over the last few trading days, with the 2-year now yielding north of 15 percent! Despite the pledge of 45 billion euros in EU-IMF loans at 5 percent or less, the markets seem concerned that the cash will not be forthcoming quickly enough to prevent a Greek default when their 8.5 billion euro redemption comes due 19 May.  Of particular concern is the provision that the EU portion of the funding must be unanimously approved EU member states, effectively granting each state a veto.  Angela Merkel, in particular has been forced to play hardball in the face of sharp domestic opposition to the bailout, as her party is facing elections in Germany's most populous state on 9 May.  At a recent rally, she was quoted as saying she "want[s] to see the program" before any proposed funds are released.  It is likely that she is simply playing the populist card and looking to score some easy political points with a harsh sound byte and who can blame her?  When as many as 80% of your constituents are against anything, you must at the very least pay lip service to their concerns.  It is reasonable to expect that Germany will not approve the aid package until after this crucial election, leaving very little time for the implementation of the program.

Timing issues and political maneuvering aside, what exactly Mrs. Merkel meant by her comment confuses me, as Greece has already offered a detailed deficit-reduction program to the EU.  Market participants seemingly had a similar reaction.  Then, throwing salt in the wound, S&P downgraded Greece from BBB- to BB+ and Portugal from A+ to A-, both with outlook negative (indicating the possibility of further downgrades in the 12-18 month space).  Not surprisingly PIIGS bond and CDS spreads, especially those of Greece and Portugal, blew out on this combination of news.  With time being of the essence, it appears that the Greek goose is all but cooked.  Restructuring strikes me as the only possibility short of a totally open-ended promise of funding from the EU/IMF - politically a near-impossibility.  If you haven't had the (dis)pleasure of seeing graphically the widening in peripheral bond and CDS spreads, please see the charts below.  Now the discussion over the broader impacts of a Greek default and how to best mitigate them begins...