Yields on two-year Greek government bonds reached 46.84% recently. This is roughly comparable to yields on Argentine bonds in early December 2001 - only a month before the country defaulted on its debt.Similar interest rates occurred this spring in Greece before the second bailout package was put together. The bailout saved Greece from defaulting back then, but the bailout is now falling apart while the fiscal situation in Greece continues to deteriorate. The risk of default in the near future has returned, but the will to stop it this time around is much weaker than in the past.
Finland and a number of other countries have already demanded collateral from the Greek government for their contribution to the bailout and this reduces the money available that can be used by the Greek government to pay off its debts. Then talks between the Greek government and the ECB, EU and IMF broke down last Friday (September 2nd) because Greece admitted it will not meet its deficit reduction and privatization targets for the year. This potentially puts the next $8 billion tranche in bailout payments in jeopardy. The talks are supposed to resume in 10 days. Even more challenges will have to be faced this coming week.
Citizens of the fiscally solvent EU countries are getting tired of paying to support what they see as the profligate spending habits of the EU's weaker economies. The bailout efforts have been lead by German Chancellor Angela Merkel, but support within her country has never been strong for them. Her ruling party has lost six regional elections this year, including one in her own home state this weekend. Any more pro-bailout efforts will only further weaken her politically.
At the same time that efforts are taking place to undermine the second bailout, more and more money is needed by Greece. Like many other heavily-indebted countries in the past, Greece is dealing with a destructive feedback loop of inexorably escalating interest costs that cause its debt to continue to rise regardless of what efforts it makes to control it. The Greek government claimed a debt to GDP ratio of 120% in 2010 during the first bailout talks. It is now estimated to be as high as 160%. Interest payments on that debt could be as high as 24% of GDP at current rates (the 10-year bond is yielding over 18%). Despite the first bailout and now the second bailout, interest rates keep going higher, the national debt keeps getting bigger and the problem keeps getting worse.
If Greece defaults, will the other bailed out EU nations see this as an opportunity to say, "Screw it" and default as well? How far will the damage spread and will it take down the EU? Interesting times indeed.