Greek Debt Risks Won't Quit

If a Greek debt default can't be ruled out, investors should realize that the Euro debt problem is a global sovereign debt problem and that as it spreads, it will slow down global economic growth.
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Abraham Lincoln had it right when he said "we must not promise what we ought not, lest we be called upon to perform what we cannot."

German-born Felix Heligmann, a money manager who plies his trade in Costa Rica, figures Greek Prime minister George Papendreou, for one, might well heed Lincoln's words, given his repeated assurances to the world that Greece will soon be the recipient of its much needed bailout package from the Eurozone countries to enable it to roll over its debt.

Near term, Greece has to come up with eight billion Euros or $11.5 billion dollars by May 19, and then raise another 20 billion euros or $27 billion for all of 2010 to meet its financial obligations.

"I've been hearing nearly every day they're getting the money, but where is it?," Heligmann asks. "Greece," he notes, "has been saying since January it's on the verge of restructuring its debt. Let's hope," he quips, "Papendreou hasn't had too much ouzo."

Heligmann raises a good point. Stories and talk that Greece's debt problems are practically history make the rounds practically every day. But so far, at least, it's virtually all talk and little in the way of concrete action as the Greece debt risks remain high. To make matters worse. Standard & Poor's has just downgraded its rating on Greek debt to junk.

I don't want to come across as a broken record, having written a piece on Greece's debt crisis in recent weeks, but it continues to be the hot topic among many market pros, some of whom believe this worry is already discounted in the market. Some others, though strongly disagree, arguing that Greece is far from out of the woods, and express fears of a domino effect that could impact the U.S. market more than is generally thought.

Byran Rich, editor of the World Currency Alert out of Jupiter, Fla., is one dogged currency tracker who thinks market concerns about Greece and other sovereign debt crises are well merited. Noting that a Greek bailout requires the approval of all 16 Eurozone nations, Rich thinks some Euro members, including Germany, the strongest, may balk at giving their money to a fiscally irresponsible country.

"We're not simply looking at a quick handout and an overnight cure," he says. Rich also believes there's at least a 20% chance Greece may not get that initial $11.5 loan. But even if it gets it, he sees tough going for Greece in obtaining its follow-up $27 billion bailout, which Rich says "is like throwing money into a black hole."

Contending that a Greek debt default cannot be ruled out, Rich sees ominous ramifications if that were to occur. For starters, he notes that 80% of Greece's government debt is held by European banks. Further, he says, the global markets have convinced themselves that the sovereign debt problem is strictly a Euro problem. Wrong, comments Rich. Investors should realize that the Euro debt problem is a global sovereign debt problem and that as it spreads, it will slow down global economic growth, which could precipitate a double-digit recession here. And for the U.S. stock market, he says, that could mean lower prices.

In reponse to my earlier column on the sovereign debt crisis -- which Rich thinks stands a good chance of being repeated in Spain, Portugal and Italy -- one HuffPost reader, a school principal, e-mailed me to inquire how he might capitalize on the sovereign debt crisis.

Rich's favorite strategy: Short the Euro (a bet its price will fall) through an exchange traded fund (FXE) that focuses on the currency shares of the Euro trust.

Meanwhile, it costs close to 14% to finance two-year debt in Greece. In Germany, it's less than 1%. Meanwhile German chancellor Angela Merkel says she won't release Greek rescue funds until the country shows it has a sustainable, credible plan to cut its budget deficit.

When that might occur is anybody's guess. So anyone who thinks Greece is nearly over the hump in its debt woes may just be downing too much ouzo.

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