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Busch: Eurozone Debt Asylum

Standard & Poor's Ratings Services today said that it has lowered its long- and short-term sovereign credit ratings on the Hellenic Republic (Greece) to 'B' and 'C', from 'BB-' and 'B', respectively according to Reuters.

S&P warned it may be cut further.

While this doesn’t provide new news, Greece continues to be in the headlines and remind everyone the trouble they are facing. Greek CDS is up 10.45% today and is $1.475 million to insure $10 million worth of Greek debt.

Another way to look at it: 1 in 7 chances that Greece will default.

This underscores my point from Friday: it doesn’t’ matter if the Der Spiegel story was true or not. The damage is done to the credibility of the Euro Zone. Essentially, Greece is like a sports star in the middle of a contract dispute. They are “negotiating” in the press and threatening to do things if they don’t get what they want. Guess what? It’s working as the EU/IMF have said that they are looking at increasing the size of the bailout funds and reducing the interest rate.

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We can expect Ireland to ask for and to get similar treatment.

By the way, did anyone notice the very soft terms Portugal got for their bailout?

According to the Economist, current PM caretaker Jose Socrates boasted that the three year program was more lenient than those for Greece and Ireland and then listed what the package did not contain:

  1. No change to the minimum retirement age or minimum wage.
  2. No public-sector pay or pension cuts.
  3. No dismissals of state workers.

Apparently, the full details won’t be known until May 16th-17th when EU finance ministers meet.

While the initial goal of the union was to be more like the United States, this path of extending the debt problem will make be more like Japan. The outcome will be sclerotic economic growth in Europe and with a remaining possibility of default.

To me, all of this will be another negative outcome for the Euro Zone as now the inmates are running the asylum. When debtors have the power to decide the term, the creditors are in deep trouble.


Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.