THE MAKING OF A GREEK TRAGEDY

THE MAKING OF A GREEK TRAGEDY

GREECE HAS NOT HAD MANY GOOD DAYS in 2010, but Thursday was a particularly bad day. First, Europe's statistical office (Eurostat) revised up the Greek 2009 budget deficit, which placed Athens' accounting shenanigans in the spotlight again. The bottom line is that the situation is even worse than previously thought, and the budget deficit may very well be adjusted up as more Greek accounting malfeasance comes to light. Following the announcement, credit rating agency Moody' s dropped Greece's credit rating one notch, immediately prompting a rise in Greek government bond yields, thus increasing Athens' borrowing costs.

The yield on a Greek 10-year bond shot above nine percent, while a two-year bond rose above 11 percent, both record highs since Greece joined the eurozone. Particularly daunting is the fact that short-term debt financing is now more expensive than long-term funding. This situation is referred to as an "inverted yield curve," and it is generally considered a harbinger of financial doom. This means that investors are sensing that Athens is more likely to experience problems sooner rather than later.

Higher yields mean that Greece is facing increasingly larger interest payments on an increasingly larger stock of debt. This all but confirms that Athens' claim that its stock of public debt will peak at 120 percent of gross domestic product (GDP) is simply wishful thinking. Worse still,

Greece, Out of Ideas, Requests Global Aid

''We drew up a plan, we took difficult and painful measures,” Prime Minister George A. Papandreou said in a nationally televised address. “But the markets did not respond.”
Greece was forced to make the request after investors shunned the country’s bond offerings because of concern about its runaway debt. Those worries intensified Thursday when the European statistics agency raised its estimate for Greece’s debt above the government’s most recent figures, pushing the yield on Greek bonds to nearly 9 percent.
At that point, the need for international funds seemed a certainty, and Mr. Papandreou made the request while on a visit to Kastellorizo, an island in the Aegean Sea.
The financing will come from an emergency aid package arranged two weeks ago in Brussels in which Greece’s euro zone partners pledged up to 30 billion euros ($40 billion) in loans to Greece. The International Monetary Fund is expected to provide an additional 15 billion euros.
Markets did not react significantly to the announcement because investors had already factored in an expectation that Greece would seek the financing.
The prospects of a Greek bailout has strained the solidarity of the euro zone — the 16 countries