September 13, 2011

Greece Teeters as Default Worries Grow

Merkel stands firm against immediate default

The odds of Greece defaulting on its sovereign debt within the next five years stood at 98% on Tuesday, as additional measures taken by its government failed to reassure investors and the cost of insuring the obligations climbed again.

However, German Chancellor Angela Merkel spoke over objections within her party to say that the Greek government was taking the right actions to obtain its next bailout loan, and said that allowing the country to default would bring trouble on other euro zone nations.

Bloomberg cited a standard pricing model as the source for the odds on Athens failing to sustain itself. It assumes that investors would recover 40% of the face value of Greek bond holdings in the event of a default. The report said that CMA, owned by CME Group Inc. and compiling prices quoted by dealers in the privately negotiated credit-swaps market, lowered its recovery assumption to 38% percent late Monday. A Reuters report put the odds of default within five years at 90%, citing CDS pricing data provider Markit.

As the odds of default rose, Merkel spoke more strongly against it, overriding her countrymen who had begun to discuss not just default but the exit of Greece from the euro altogether. As previously reported by AdvisorOne, dissent among German officials over the ability of Greece to meet its obligations and its presence in the euro zone have driven cracks in the front Berlin presents over the issue.

Merkel, nonetheless, was firm that an “uncontrolled insolvency” would quickly spread throughout the euro zone. In an interview on German Inforadio Tuesday, she pointed out that there will be no “orderly” mechanism for insolvency until the permanent rescue fund is established in 2013. Until then, it could lead to disaster.

“The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece and the danger that it hits everyone, or at least a number of other countries, is very big,” she said. “I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.” She also cautioned speakers on their comments: “Everybody should weigh their words very carefully. What we don’t need is unrest in the financial markets. The uncertainties are big enough as it is.”

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