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Here Is What Happens After Greece Defaults

Submitted by Tyler Durden on 05/21/2011 19:49 -0400

When it comes to the topic of Greece, by now everyone is sick of prevaricating European politicians who even they admit are lying openly to the media, and tired of conflicted investment banks trying to make the situation appear more palatable if only they dress it in some verbally appropriate if totally ridiculous phrase (which just so happens contracts to SLiME). The truth is Greece will fold like a lawn chair: whether it’s tomorrow (which would be smartest for everyone involved) or in 1 years, when the bailout money runs out, is irrelevant. The question then is what will happen after the threshold of nevernever land is finally breached, and Kickthecandowntheroad world once again reverts to the ugly confines of reality. Luckily, the Telegraph’s Andrew Lilico presents what is arguably the most realistic list of the consequences of crossing the senior bondholder Styx compiled to date.

What happens when Greece defaults. Here are a few things:

Every bank in Greece will instantly go insolvent.
The Greek government will nationalise every bank in Greece.
The Greek government will forbid withdrawals from Greek banks.
To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.
Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)
The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.
The Irish will, within a few days, walk away from the debts of its banking system.
The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.
A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.
The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.
The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)
They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.
This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.
Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.
Attention will turn to the British banks. Then we shall see…

Contagion.

From Simon Black

The world is now divided into essentially three categories:
(1) those nations that can effectively sidestep catastrophic meltdown;
(2) those nations that cannot avoid meltdown, but can afford to kick the can down the road
(3) those nations that must face their grim, unavoidable meltdown reality now

The United States, for better or worse, is in category 2. Politicians can keep pretending that the wheels on the bus go ’round and ’round because, at present, there are too many other countries in category 3… namely, much of Europe.

Greece is on the brink of official insolvency… yet in an exceedingly bizarre interview with German news magazine Der Spiegel published today, Jean-Claude Junker insists that (a) Greece is not broke, (b) if Greece doesn’t make its debt payments, this is not the same as ‘default,’ and (c) it’s OK for politicians to lie because people don’t understand capital markets.

(*Note, suspension of disbelief IS required to read this interview; Junker caps it off with a metaphoric riddle, “If the donkey were a cat it could climb a tree. But it is not a cat,” which has about as much insight as “Confucius say: Man who go to bed with itchy butt wake up with smelly finger….”)

As the Prime Minister of Luxembourg and president of the Euro Group, Junker is a very important figure in European finance… and in the interview, he makes it quite clear where his priorities lie: with the bankers.

As Junker states, “If Greece were to declare a national bankruptcy tomorrow, the country would have no access to the international financial market for years to come, and its most important creditors, the banks in Germany and Europe, would have an enormous problem…”

Well, certainly no one should expect Europe’s banks to suffer their own losses after making idiotic loans to corrupt governments. It’s much easier to stick the people with the bill by establishing a trillion dollar bailout fund with taxpayer money.

Problem is, people in Europe are starting to wake up and get it.

The anti-euro “True Finn” party in Finland recently surged in the polls to become the country’s third-largest political party and a major obstacle for any European bailout. This weekend, Spain’s ruling Socialist party was hammered with losses as voters voiced their utter disgust with the current government’s handling of the economy.

In Germany, this year’s state election results are showing that voters are sick and tired of shouldering the financial burden for the rest of Europe. Chancellor Angela Merkel’s ruling party is losing miserably, though in a pathetically desperate move, some local governments are changing suffrage limits and allowing 16-year olds to vote.

This is the strongest indicator yet of how bad the situation in Europe has become: German banks are so over-exposed to the PIIGS sovereign debt that, in the face of political revolt all across Europe, German politicians have resorted to recruiting the Justin Bieber crowd to maintain the status quo.

Simply put, if Greece fails, the banks will collapse, and European financial markets will tank. Politicians will stop at nothing to prevent this from happening… including sticking every man, woman, and child with the bailout bill, as well as pulling socialist-minded teenagers into the voting booths to ensure they stay in power.

Eventually, though, these efforts will prove fruitless. Greece has two months of cash left… and a default by any other name is still a default. The ‘have’ nations in Europe don’t want to foot the bailout bill any more than the ‘have not’ nations in Europe want to accept deep austerity measures.

This is going to cause a lot of turmoil in Europe in the short-term… and as the US government has successfully kicked its can down the road through late summer thanks to the Treasury Department plundering public pension money, investors are free to get their worry on in Europe.

I would suspect gold and silver in euro terms to do quite well as the market looks around, once and for all and realizes that there are truly no good major currency alternatives. This could be the start of a chain reaction.

The “Game Over” Redux
Submitted by Tyler Durden on 05/19/2011 21:01 -0400

Back in November, we posted a piece by Knight Research titled “The Game Is Over” in which the firm’s strategist Mark Lapolla presented his thesis why he believes that “the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyze a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over.” And while the article came out just as the barrage of $750 billion in daily POMOs courtesy of QE2 was starting and hence masked the true state of reality, now that QE2 is finishing, it is only appropriate to bring Mark back up front, as the imminent and very violent convergence of the rosy myth that is the stock market, and of the underlying miserable reality, is about to wake up all those who have been dozing under the Printer Piper of Eccleslin’s soothing tune, and Lapolla’s thesis is about to see its first validation. In essence, while we have heard much from those who claim that the end game will come as a result of hyperinflation, Lapolla is convinced in the opposite: namely that the end will be not a bang but a hyperdeflationary whimper. In order to refresh readers with his thoughts, recently Lapolla conducted an interview with the master questioner Kate Welling in which the Knight strategist laid out his uber-bearish case in more gruesome detail than most can stomach. Below we present the key points from his interview, as well as the full thing subsequently.

In a nutshell, and this won’t come as a surprise to anyone, Lapolla believes that “the game is over because there is no collateral… When consumer debt is rooted 75%-plus in residential real estate and residential real estate is impaired, easy Federal Reserve monetary policy simply cannot make it to Main Street. The transmission mechanism is broken. There is no conduit. ”

Lapolla’s observations on the secular shift in the employment structure:

What’s going on here is very simple. John Maynard Keynes wrote a letter entitled, “Economic Possibilities for our Grandchildren “in 1930, in which he coined the term “technological unemployment.” He said it’s a term nobody has heard of, but you are going to be hearing a lot about it. Of course, he was writing about the use of technology to supplant labor in the factory… Any way you slice it, nominal wages, real wages, hourly wages, the duration of unemployment — all of these measures imply that we have a growing structural fracture in the labor markets.

On the irrelevance of week to week and month to month micro fluctuations in the jobs numbers:

Right now, the full employment gap is running about 11 million jobs. That’s a shocking gap and, although this is very difficult to quantify, we have a sinking suspicion that — while a number of the jobs that are being created right now might in fact be “good jobs” – they’re being filled by over-qualified labor no longer able to wait for jobs at compensation levels similar to what they had before. Now, in the very long run, this might work itself out, but in the short run it doesn’t do anything to change the outlook for the consumer. What it does is suggest that people are going to have to shift down the way they live and the way they expect to live — perhaps even further than they already have. Thus, the propensity to save in this country has to continue to rise — which (although not in the short term) is very bullish long term — whether that’s captured in the aggregate data or not. So as you’ve gathered, we are very different from consensus, first and foremost, when it comes to the secular structure of labor and credit in the U.S.

On the previously discussed topic of Squatter’s Rent (discussed extensively here):

There are roughly six to seven million folks who are no longer paying on the mortgages on their homes, so if we do some really simple arithmetic, it suggests in the aggregate as much as $100 billion of annualized consumer income is being freed up to find its way into consumer spending elsewhere in the economy, instead of going towards the satisfaction of housing debt…, the real question is if, or when, does the foreclosure mechanism begin to kick back into gear and then accelerate? At this juncture, there really isn’t a tremendous amount of evidence that it’s going to accelerate. Let me give you a tangible example. We know someone who has lost his job and is in a home with a $1.45 million mortgage. The house is on the market at $1.3 million, which we guess is the degree to which the home has been written down on the books of the mortgage holder. The property taxes on the home are about $20,000 a year, so he has been expecting an eviction notice or a foreclosure proceeding for almost 18 months. Yet his property taxes have been mysteriously paid every year. What is going on is clear: If the bank or whomever holds that mortgage note were to foreclose, the house’s liquidation value is prob¬ably about $900,000. So they would have to take a further $400,000 writedown on that mortgage. Which makes paying $20,000 a year in property taxes, look like a relative bargain.

On Europe’s state of suspended animation:

Europe right now is still kicking the deflationary can down the street; trying to postpone and prolong the inevitable. Meanwhile, they’re trying to cover their tracks with verbiage claiming they’re pursing mandated fiscal and monetary austerity policies and monetary policy. But the ECB’s bump up in rates of 25 basis points isn’t material. And all of this is intensifying the deflationary pressures on the periphery countries. So Europe is in a state of suspended animation, where the deflationary pressures are spilling out but even the sort of modest financial restructuring the United States is trying is still being resisted. It’s clearly not a stable situation.

On the “China” question:

I think the China situation, how¬ever, is profoundly obvious and profoundly simple. The idea that the free world is placing its hope in a repressive, communist regime employing command and control economic management while violating trade protections and human rights everywhere is absolutely astounding, amazing. I would suggest that, in itself, should be a sufficient warning flag. But let’s be a lot more specific. I actually see the situation in China as very analogous to the U.S. in 1929 and Japan in the 1980s….I’ll just tick off eight similarities between China circa 2011 and the U.S. before the Depression. 1) Massive disparity of wealth, income, and education. 2) Rapid industrialization and displacement of labor. 3) Opaque and misleading economic and financial data. 4) Massive build-up of leverage across the “rising” class. 5) Bubbles in both residential real estate and fixed asset/infrastructure development. 6) Accelerating and uncontrolled growth in disintermediated credit. 7) Expected transference of economic growth to domestic demand. And, finally, an accelerating price/wage spiral. Nonetheless, to China’s credit, they have a booming economy which has drawn the attention, admiration and certainly the economic aspirations of the world. The irony is, despite its hubris, China appears to have lost control — and has done so by doing everything it could to avoid that. Essentially, in its own zeal to placate its masses with rapid growth, China has created a tide of inflation that threatens it with wide-spread social unrest. But if it crushes speculation and clamps down on credit, it risks a deflationary collapse that would also threaten social harmony. The upshot is that China no longer controls its own destiny. The free markets do. As an aside, I would suggest that in the not-too distant future, when this all unravels, there will be downside as well as upside for the U.S., particularly as it relates to what we were talking about before, the way the U.S. has benefited from the value of intellectual property versus scale.

On China’s Lewis Point (discussed extensively here):

If there was one thing that pushed us over the edge to publish it last November, it was our belief, now confirmed, that China and an increasing number of other emerging markets are caught in a price/wage spirals that they’re not going to be able to control through monetary, fiscal or legislative policy. These are an inevitable result, not only of the credit boom, but of the manufacturing engine they’re living by. This is the great differentiator between the U.S. and China. The reason a systemic inflation cannot happen here for a long time and why it is happening in China is simply this: When labor is in the business of manufacturing goods (as opposed intellectual property or services), labor has a call on rising finished goods prices. When commodities prices begin to increase and manufacturers attempt to raise finished goods prices, wage rates must go up or labor’s value is necessarily diminished. This is the dynamic traditional U.S. manufacturing businesses faced decades ago, and now, in China, it has reached epic proportions. We’ve seen 20% to 30% wage increases by the government on the low end and by contract manufacturers such as Foxconn (FXCNF), which does the Apple (AAPL) iPhone, on the high end. It has raised wage rates, almost 30%. China bulls believe this wage inflation is good for workers and so ultimately is going to help China accelerate consumer demand as an engine of their growth. Nonetheless, it hasn’t and won’t, for a couple of reasons. 1) Savings rates actually are rising in the major city centers. 2) China’s consumer confidence numbers and research on the ground in China both show that labor has never been less secure than they are now, which seems paradoxical. One would think that China’s new¬found international power, along with higher incomes, would make Chinese workers feel all is right with the world. The problem is that the cost of living is growing even faster. Without getting too technical, China has probably crossed over what’s called, in academic theory, the Lewis Point, where the movement of labor from agriculture into manufacturing reaches a peak and begins to taper off as manufacturing labor begins to reconsider whether life in fact wasn’t better back on the farm.

On the link between inflation and money:

Increased money supply is not a causal factor for inflation. It’s like suggesting that a bartender is a causal factor for alcoholism. In reality, reserves, whether they exist in the system’s books or not, are always available. Credit creation cannot really be controlled. If you and I want to create a loan between ourselves, we can do it. If a bank wants to create a loan, it can do it. The only thing that can mitigate that ability is regulation of the banks. However, if we consider the off-balance-sheet and shadow banking mechanisms, there really is no way to control that credit creation. The only way the Federal Reserve can influence credit creation is by raising or lowering short-term rates. With that said, we’re at the outer bound, at zero, and what we’re finding is that demand for money is not increasing as the cost of money goes to zero — which is not unlike what we saw in Japan. What is happening, however, as ever when the cost of money stays this low, is that speculators are inclined to speculate because the cost of speculation on leverage is negligible.

The reason why, in Lapolla’s opinion, the Fed has failed in generating systemic inflation (and why the Fed will keep coming back, and doing the same wrong things over and over until everything finally breaks)

The reason [we don’t have systemic inflation] is that the labor markets are fractured. So, at the end of the day, what we’re having now is an asset inflation again, an echo. We’re not seeing the seeds or leading edge of wage/price inflation, the true driver of damaging systemic inflation. Asset inflation resolves itself in one way, and one way only, and that’s through asset deflation. So we have ongoing asset deflation in the residential real estate market. We have ongoing asset deflation in the commercial real estate market and we will ultimately have asset deflation across China and Asia.

On what would happen to the global economy if the dollar were to collapse versus the euro and commodities:

Global deflation and depression are what would happen.

On what self-cannibalizing HFT algorithms means for volume and for the markets in general.

Doesn’t it necessarily imply that there must be real inefficiencies in pricing on the table, for long-term investors, if everyone is totally focused on the short term? So, suggesting that “the game is over” has implications across the board. It has implications in terms of the way asset allocators think about investing, the way their money managers think about deploying capital, and ultimately about the way corporate managers think about deploying shareholder capital. We in effect are in this very awkward “teenage” stage where we’ve just had this fracturing shock, the credit crash, the exposing of all the financial hubris and misallocation of capital. We haven’t even moved to credibly addressing those issues in Europe and we’re still holding onto the notion that the emerging markets — which are just getting their first taste of capitalism on the back of reckless credit expansion and speculation — can somehow become the engine that overwhelms the massive deleveraging of the developed world. It’s a preposterous notion. I’m not being fatalistic. This is the way history moves. In 30 years, it will be clear to people, looking back, that this is the final chapter of the old story in which finance, financiers, leverage and short-term trading ruled the world.

On what the “sequel” is:

We’re moving towards something that, by definition, is going to have to address the real structural issues — in the U.S., fractured labor markets, still-excessive credit and unsupportable levels of debt tied to homes, a rising propensity to save, bleak expectations for wages and investment returns. From our vantage point, it’s only a question of timing. But it’s entirely possible that there won’t be an asymmetrically positive outcome for the globe. “Growth” is not a fait accompli. In fact, there can and probably should be periods, lengthy periods, of virtually no growth; of consolidation and pruning. So we would reject the notion that growth necessarily has to happen. Very marginal, just population-type, growth could in fact be the order of the day, and that implies a re-pricing of risk capital across the board.

Lastly, his investment advice:

Those who are bit more speculative, we’re encouraging to pick a spot where they will buy the U.S. long bond, if not zeros on the U.S. long bond, as rates start to move closer to 5%. It’s likely to have very high, equity-type returns, in short bursts.

from zero hedge

All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week’s announcement by PBoC Governor Zhou (Where’s Waldo) Xiaochuan that the country’s excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the “buy US debt” Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that “end of QE” again?

From Xinhua:

China’s foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

And as if the public sector making it all too clear what is about to happen was not enough, here is the private one as well:

China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.

Tang’s remarks echoed the stance of Zhou Xiaochuan, governor of China’s central bank, who said on Monday that China’s foreign exchange reserves “exceed our reasonable requirement” and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.

However, these strategies can only treat the symptoms but not the root cause, he said, noting that the key is to reform the mechanism of how the reserves are generated and managed.

The last sentence says it all. While China is certainly tired of recycling US Dollars, it still has no viable alternative, especially as long as its own currency is relegated to the C-grade of not even SDR-backing currencies. But that will all change very soon. Once the push for broad Chinese currency acceptance is in play, the CNY and the USD will be unpegged, promptly followed by China dumping the bulk of its USD exposure, and also sending the world a message that US debt is no longer a viable investment opportunity. In fact, we are confident that the reval is a likely a key preceding step to any strategic decision vis-a-vis US FX exposure (read bond purchasing/selling intentions). As such, all those Americans pushing China to revalue, may want to consider that such an action could well guarantee hyperinflation, once the Fed is stuck as being the only buyer of US debt.

Sitting here watching the €uro get hammered on the Greece rumour, I was idly trawling through some of my favourite sites and re-read this piece from Gonzalo Lira written a while back [December 2010]. Seems that now the pressure is off the USD, (obviously, now Gold and Silver have had a ‘correction’), attention has turned again to the other problem currency.

☞ Possible EMU Collapse: What To Pay Attention To In 2011

After the Greek and Irish bailouts, it looks like Portugal and possibly Belgium are up next in this perverse game of musical chairs played to the tune of sovereign debt—

—but these smaller countries are dwarfed by Spain: Spain, as I argued here, is where the European game is really at.

As I pointed out, Spain is twice the size of Greece, Ireland and Portugal combined—Spain is roughly half the size of Germany—Spain has a fiscal deficit of over 11% of GDP for 2010, and a total debt of over 80% of GDP, data here (I am counting the accumulated debt of comunidades autónomas, which is so far 10.2% of GDP and steadily rising; data here)—Spain has an unemployment of over 20%—

—in short, Spain is trouble.

Not “Spain is in trouble”—that’s obvious, but that’s not my point: Spain is trouble. Trouble for the German banks that own so much of the Spanish debt. Trouble for Germany, which is propping up its insolvent banks (What, you think German politicians are any less craven than American politicians?). Spain is trouble for the European Union, for what a German banking crisis might mean for the EU as a whole and as an institution.

More than anything, Spain is trouble for the European Financial Stability Facility, because Spain is too big to be saved—and there’s really no way to finesse that hard fact.

You know what a lynchpin is? Actually, I didn’t—I had to look it up. According to the dictionary, a lynchpin is “a pin passed through the end of an axle to keep the wheel in position”. Hence the figure of speech: Without a lynchpin, the wheel comes off, and the whole vehicle crashes.

In the case of Europe, the lynchpin can come off awfully fast—think of Ireland. A few impolitic words from Angela Merkel, and suddenly the Irish bond market panics. Suddenly, Ireland is teetering on the brink of insolvency, unable to meet its funding needs. And that was Ireland—all due respect to those wonderful people, but we’re talking a GDP of a paltry $227 billion. Ben Bernanke takes a morning dump bigger than that. What’s Ireland’s $227 billion when compared to Spain’s economy of $1.5 trillion?

Spain: During 2011, Spain will be the flash-point—so you want to keep one eye on Spanish sovereign bond spreads, and one eye on Brussels:

When Spanish debt spreads over German bunds creep into the 3.5% to 4% range, you know trouble is coming. And when the Spanish spread decisively crosses 4.25% over the German 10-year, then you know trouble’s arrived—and it won’t be leaving town ‘til it’s had its chance to run riot in the streets.

How the EU and the ECB handle an eventual Spanish sovereign debt crisis will determine the very future of the European Union.

Because there will be a Spanish sovereign debt crisis—it’s inevitable. The Spanish balance sheet is not improving fast enough, even with so-called “austerity” measures, because even though the Spanish government might be cutting spending, the comunidades autónomas—roughly analogous to states or regions—are expanding their budgets in order to take up the slack, and thereby increasing the Spanish deficit. Don’t believe me? Check the figures I just cited.

So when Spain goes into crisis—which should take place no later than August 2011, and perhaps as early as this coming March—the European Union’s collective and institutional reaction to this crisis event will determine whether a smaller, healthier European Monetary Union continues to exist, or whether the whole concept of EMU is ripped to shreds by events.

If the EU and the ECB are clever, and brave, and humble in the face of failure, then they’ll expel Greece, Ireland, Portugal, Spain and Italy from the European Monetary Union. The euro will remain the currency of the stronger economies—France, Holland, Germany—while the weaker economies will go back to their original currencies, and immediately devalue so as to kickstart their economies.

If, however, the European Union and European Central Bank leadership proves to be stupid, cowardly, and arrogant—as is very likely, considering their confused, self-defeating actions and reactions to the Greek and Irish crises—then there will be some sort of European-wide convulsion, when the bond markets panic, and leave Spain locked out of any funding.

This is the key event of 2011: Whether the European Monetary Union survives. Unless Brussels gets its collective shit together and realizes it has to cut the weaker economies loose from the euro, odds are high the euro goes the way of the dodo.

From Der Spiegel

German bund futures rose to an almost one-month high after Der Spiegel reported that Greece is considering withdrawing from the euro region, prompting investors to seek a refuge in Europe’s benchmark securities.

The futures contract expiring in June climbed 0.6 percent to 123.76 as of 6:20 p.m. in London. Greece isn’t considering abandoning use of the euro as its currency, the Athens-based Finance Ministry said in an e-mailed statement today. Such reports have been repeatedly denied by Greece in the past as well as by governments of other European Union countries, the statement said.

Greece is lobbying for easier terms on the 110 billion euros ($164 billion) of bailout loans as speculation of a default mounts a year after European leaders set up the unprecedented emergency fund to prevent the nation’s debt woes from spreading.

“Some sort of Greek restructuring was priced in the market, but the thought of them leaving the euro-zone never really was,” said Anthony Cronin, a Treasury trader at Societe General in New York. “If there’s something that happens over there this weekend, you’ve got to be properly positioned for it.”

The euro fell against all of its 16 most-traded counterparts, extending its two-day loss as much as 3.1 percent, the most since May 2010. U.S. Treasury notes reversed earlier losses as investors also sought U.S. government debt as a haven.

Debt Burden

EU leaders agreed in March to create a permanent rescue mechanism for the euro area, the European Stability Mechanism, or ESM. The ESM, which becomes effective in mid-2013 after a temporary facility expires, will make loans to fiscally strained governments under strict conditions. When governments can’t cover their debts in full, the ESM’s loans may be paid first, before private bondholders.

Even under cuts imposed as a bailout condition, Greece’s debt is forecast to climb to 159 percent of gross domestic product in 2012. The nation’s economy is forecast by the government to shrink for a third year in 2011, before returning to growth in 2012.

Greece’s possible exit from the euro area isn’t being discussed in the EU, said Steffen Seibert, German Chancellor Angela Merkel’s chief spokesman. “This isn’t on the table and hasn’t been on the table for the German government and isn’t a topic at the European level,” he said by telephone today.

Since exit is the sensible option for the people of Greece, this denial by Herr Siebert could signal an outbreak of common sense…