So Greece will avert a default once more, with its well-meaning neighbours pumping morphine into a terminally ill patient. Ultimately, it may be cheaper for Greece to default. The EUR is too expensive for Greece, making it uncompetitive. By defaulting, the Greeks can revert to Drachmas which will further devalue. It will cause turmoil for the financial markets but if they bail out their domestic banks things should be under control. True, if Greece defaults they won't be able to borrow. But if we follow the Russian example, they moved quickly back into the black within a year of their default. Their currency devalued so much that they started to achieve a trade surplus.

The problem with the current bailout is that it doesn't stimulate Greece's growth. They should restructure their economy to make it more competitive. Labour markets should be more free.

The US debt ceiling should be raised without problems in Aug 2011. The end of QE2 should be factored mostly by the market. So why is the credit spread still rising? why did it rise to 348 bps today? Is there something lurking in the corner?

I am still very cautious. Will a reversal in the short term looks possible now, no rebound is sustainable if the credit markets don't tighten. Stay tuned. I'll start buying in July. We'll see.

European Banks Near 70% Greek Rollover Deal

By Aaron Kirchfeld and Helene Fouquet - Jun 27, 2011 8:21 PM GMT+0800

France's President Nicolas Sarkozy. Photographer: Jock Fistick/Bloomberg

Greek creditors may be headed toward an agreement to roll over 70 percent of their bonds into longer maturity debt to prevent a default and meet politicians’ calls that they contribute to Greece’s second rescue in as many years.
“We’ve been working on this,” and hope other countries will join the proposal, French President Nicolas Sarkozy said today at a press conference in Paris. Germany’s biggest banks and insurers are weighing the French proposal, a person familiar with the matter said today.
German and French lenders are the biggest European holders of Greek debt and their participation in the plan is key to achieving a European Union goal to get banks to roll over at least 30 billion euros ($43 billion) of bonds. The rollover is part of a broader aid package that EU leaders have pledged to pass next month to prevent the euro-region’s first default a year after the 110 billion-euro Greek bailout that failed to stop the debt crisis.
The Markit iTraxx SovX WE gauge of default swaps on 15 governments rose 5.5 basis points to 247.5, after earlier reaching a record, and contracts tied to Greece climbed 23 basis points to 2,138, signaling an 84 percent probability of default within five years, according to CMA. Swaps insuring Irish bonds added 27 basis points to an all-time high 832 and Portugal increased 21 to a record 859.

Eligible Bonds

European banks hold 17.2 billion euros of Greek bonds maturing by the end of 2013, Citigroup Inc. (C) estimated in a June 23 report. Greek banks, which will join a rollover, hold almost 22 billion euros of bonds maturing in that period and the country’s central bank owned 5.1 billion euros of the debt likely eligible for the rollover, Citigroup estimated.
France’s proposal for a 70 percent participation target came after separate talks last week with German, Dutch, Belgian and French banks on the rollover. “The German government welcomes it when proposals come from the private sector, including those on private-creditor participation that are now coming out of France,” German Finance Ministry spokesman Martin Kreienbaum told reporters in Berlin today. Talks with German financial institutions are ongoing, he said.
“If the private sector is voluntarily getting involved then that would be seen as positive because it would help avert a Greek default,” said Orlando Green, a fixed-income strategist at Credit Agricole SA (ACA) in London.

Special Fund

Under the French plan, 50 percent of the Greek debt held would be rolled over into 30-year bonds. The remaining 20 percent would go into a special purpose vehicle used to guarantee the 30-year debt, a person familiar with the plan said yesterday.
Negotiations shifted to Rome today where Director General of the Treasury Vittorio Grilli hosted representatives of some of the world’s biggest banks. Grilli is chairing the meeting in his capacity as the head of the European Union’s Economic and Finance Committee, which helps prepare policy for European finance ministers. He is in discussion with a group of bank executives and Charles Dallara, managing director of the Institute of International Finance, which represents more than 400 of the worlds’ biggest financial services companies.

EU, ECB

The European Commission and the euro zone were represented at a technical level at the Rome meeting, commission spokesman Amadeu Altafaj said today in Brussels. The European Central Bank, the biggest holder of Greek debt, was also taking part in the Rome talks, according to a person familiar with the negotiations.
Sarkozy insisted that any participation by banks had to be voluntary. Credit rating companies have threatened to rule Greece in default if banks are coerced into rolling over debt, a move that would devastate the country’s banking system and possibly drag down other high-debt nations such as Portugal, Ireland and Spain.
“If it wasn’t voluntary, it would be viewed as a default, with huge risks of catastrophic results,” Sarkozy said.
The European Commission also insisted that “there is no coercive element envisioned,” Altafaj said. “We don’t want under any circumstances there to be any kind of selective default.”
To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at Helene Fouquet in Paris at hfouquet1@bloomberg.net
To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net