Greeks Get Default Deadline

Bonds can be a boring business…right up until they’re not. Scanning the globe today, the theme is debt, and companies and nations desperate to deal with it.

Let’s recap. The easy target: Greece.

“If risks to Greece’s deficit targets materialize, then Greece will announce additional steps by mid-March,” said European Monetary Affairs Commissioner Olli Rehn yesterday.

Translation: The EU is giving the Spartans 30 days to get their act together. If the appropriate steps aren’t in place by mid-March, the EU will step in and do it for them.

The lack of a specific plan is putting Greek bonds in the hurt locker. The yield on Greek 10-year notes has risen 21 points since yesterday, to 6.45%, their highest yield in three weeks.

Greece is putting the kibosh on corporate debt plans, too: Global companies canceled the most debt sales over the last month since the credit crisis began in 2007. According to Bloomberg data, 16 major corporate bond sales were canceled.

“The Greek government will default soon,” our bond vigilante Dan Amoss forecasts, putting the whole mess into perspective “unless we see a combination of sharp cuts in spending and a bailout from wealthier neighbors.

“But who wants to bail out a very distant neighbor from the consequences of his foolish behavior? European politicians are debating how to sell the idea of a bailout to their taxpaying, voting populations. This is an attempt to contain the damage from the last decade’s overspending of the Greek government.

“The stronger economies of Europe – the ones not driven by government spending and tourism – are in a pickle. If they let Greece default on its debt, the consequences for financial markets could be sharp and very painful. If they extend a lifeline to the Greek government, every other irresponsible government will line up for a bailout. At that point, everything may appear to be under control, but a few years down the road after a round of bailouts, the problem will emerge once again. They will remain in place until the size of welfare states and banking systems fall in line with the productive capacities of the economies that support them.”

Stock traders welcomed the EU’s lukewarm support with open arms. One less crisis on the horizon, they’re saying. The S&P 500 opened up 0.75% this morning, largely on the news above.

“But doth a single bailout a real boom make?” asks Bill Bonner. “Let us rephrase that. Will bailing out the spendthrift Greeks really make American businesses more profitable?

“You know the answer. It won’t. In fact, it will make them less profitable. What it does is allow the Greeks to continue spending in the style to which they’ve become accustomed. And if the Greeks are going to do that, you can bet that the Irish aren’t going to want to cut back. Or the Portuguese. To say nothing of the Italians. And what about the English?

“Bailing out the Greeks is a big mistake. But it’s a mistake everyone seems to want to make. There’s probably a Latin dictum for this sort of thing. But since we don’t know what it is, we’ll have to coin the phrase ourselves: Imbecility begets imbecility; especially when the bankers come out ahead.”

The Daily Reckoning