Greece's Debt Crisis Worsens: Will Europe's Other 'PIIGS' Get Fried?

Greece's financial crisis worsened Thursday. Moody's downgraded its bond ratings on Greek debt. This after the European Union's statistics agency revealed Greece's deficit is wider than expected. The IMF chief termed the developments "serious," adding there's no "silver bullet."

The markets reacted sharply to the news: Yields on 2-year Greek debt topped 10% for the first time since 1999, the euro approached a 1-year low vs. the dollar and a global stock selloff spilled over in the U.S. markets. 

Representing just 2% of euro-zone GDP, the problem is not that Greece is "too big to fail" but that it is too interconnected to fail, as Aaron and Henry discuss in the accompanying segment. If Greece were allowed to default on its debt (a remote but not impossible scenario) it would call into question the long-term viability of the euro and, more immediately, raise more concern about Europe's other so-called PIIGS: Portugal, Ireland, Italy and Spain.

A Real Greek Drama So far in this dragged out drama, Greek and European officials have failed to isolate Greece's problems and prevent them from spreading to Europe's other heavily indebteded nations, as noted here by former guest Mark Dow, a macro hedge-fund manager.  

As AP reports here, the Greek government is holding talks with the IMF, the European Central Bank and the European Commission to develop a three-year debt rescue package for the country. Meanwhile, Greek civil servants were staging a 24-hour strike. Local labor unions fear even deeper civil-service job cuts. 

As explained here in the NYT, the interest rate gap, or spread, between Greek 10-year bonds and German ones — considered a benchmark of stability — widened to 5.29 percentage points. Bottom line: It will be more difficult for Greece to access cash and shore up its finances.

"Greece seems to be headed to a debt restructuring where haircuts are going to have to be taken as it seems the only way out for them as its impossible for their economy to grow out of their debt obligations," writes Miller Tabak strategist Peter Boockvar. "The euro zone cannot guarantee Greek debt as who would buy a German bund yielding 3.05% when you can buy German-guaranteed Greek debt at 8.5%?" 

Click on the player to learn more about whether Greece ultimately is headed for insolvency.