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At this point a Greek debt default is virtually unavoidable, and it could happen in a matter of weeks.
The ensuing chain reaction will upend markets around the world and will almost surely lead to more defaults among the European Union's (EU) other debt-plagued nations, collectively known as the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
The bond markets have already passed sentence, with the yield on two-year Greek bonds spiking to an astronomical 76% yesterday (Tuesday). Yields on 10-year Greek bonds rose to 24%.
By comparison, the 10-year bond yields of another PIIGS nation, Italy, rose to 5.74%. Meanwhile, bond yields for the EU's strongest economy, Germany, have dropped below 2%.
The credit default swap (CDS) markets, where investors can insure their bond purchases against default, agree with the bond markets' verdict. As of Monday it cost $5.8 million and $100,000 annually to insure $10 million worth of Greek debt for five years, which means the CDS market now considers default a 98% probability.
Most European stock markets have been hammered over the past several weeks, with some dropping as much as 25%.
"Default is inevitable," said Money Morning Global Investment Strategist Martin Hutchinson. "Greeks are paid about twice as much as they should be, and that gap can't be solved by austerity."
How Soon is Now
In recent weeks Germany has shown more reluctance to dig deeper into its own pockets to bail out Greece and the other PIIGS. At the same time, Greece has struggled to implement the austerity measures that are required if it is to continue receiving aid from the European Central Bank (ECB) and the International Monetary Fund (IMF).
Greece's budget deficit has increased 22% this year, while its economy is projected to shrink more than 5%.
Every new development appears to bring Greece closer to the brink of default - and some see that happening in the very near future.
"My guess is there will be a Greek debt default by the end of this fiscal quarter - yeah, that means very soon," said Money Morning Capital Waves Strategist Shah Gilani.
Gilani believes that Germany is about to stop sending money to the ECB to shore up Greece and its fellow PIIGS so it can start "recapitalizing its own banks to be ready to handle a Greek default and rolling contagion that may result."
People fear a Greek debt default because of the likely domino effect among the other PIIGS, Gilani added.
"The biggest problem I see is that the stability fund -- which is a lifeline to all the member countries in trouble -- is supported by all of them," Gilani said. "If anyone falls down, the others have to kick in more. Ask yourself, if you were about to default yourself and you see Greece default, are you going to stick around to pony up more money to help the next guy, or are you going to jump up and be the next guy?"
Worse than Lehman
Many analysts fear a Greek debt default will trigger a global banking crisis worse than that unleashed by the failure of Lehman Brothers in 2008.
Carl B. Weinberg, chief economist at High Frequency Economics, believes a Greek debt default would rapidly lead to the assumption that some or all of the other PIIGS also would default.
A 50% loss on the PIIGS nations' total debt of 3 trillion euros would dock the financial system by 1.5 trillion euros - less than half of Lehman's losses, the equivalent of 600 billion euros.
"This is a shock that easily spread around the world quickly, as did the hit from Lehman," Weinberg told CNBC.
Weinberg saw no way out of the coming disaster.
"The combination of Greek economic and fiscal mismanagement and German intransigence adds up to an intractable situation in euro land," Weinberg said. "The price will be a banking crisis of historic proportions, and a knock-on economic depression."
Prepare Your Portfolio
With the Greek debt default crisis nearly upon us, investors need to map out their strategy now.
According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, investors should take the following steps to protect themselves:
- Sell weaker positions and transition that money into companies you really want to own -particularly if they are the "glocals" we talk about so frequently, and especially if they have high dividend yields.
- Begin tightening up your protective stops so that you can both capture gains and protect your capital as the market rolls over.
- Buy commodities including gold, silver, oil and pharmaceuticals.
- Invest in the specialized reverse exchange-traded funds (ETFs).
- And, most importantly, KEEP BUYING - but change up your tactics to include dollar cost averaging. There's no sense in making all-or-nothing decisions when that type of thinking doesn't fit market conditions.
"Remember, you miss 100% of the shots you don't take, so getting to the sidelines is not a profitable plan," Fitz-Gerald said. "Staying in the game always has been, and always will be, the way to profit."
News and Related Story Links:
- Money Morning:
Special Report: What is the Greek Debt Crisis, and What Does it Mean for Investors? - Money Morning:
The Only Way to Solve the European Sovereign Debt Crisis - Money Morning:
Credit Default Swaps: Why Washington Ignored Our Warning - Money Morning:
The Next Global Credit Crisis: Why U.S. Banks and Greek Debt Will be the Toxic Trigger - Money Morning:
The European Banking System is Finally on the Verge of Collapse - MarketWatch:
Greek default fears mount, markets tumble - The Wall Street Journal:
CDS Insurance Against Greek Default Still Available, In Exchange for Immortal Soul - Reuters:
Bunds hit new high as default fears pummel Greek debt - The Financial Times:
Fears of Greek debt default rattle investors - Bloomberg News:
Greece Default Risk Jumps to 98%
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.
Can you help me understand if a lot of this already priced in to the markets or not?
Wouldn't Gold and Silver tank as they did in 2008 if markets were to fail / collapse?