There is renewed fear today that there is going to be a default in Greece as a headline crossed on Bloomberg TV that Germany is near plans to shield banks if Greece defaults. Over the past few days, there has been a spike in the 1 and 2-year rate for the Government bonds of Greece and there has been a big move on CDS levels – now at a record.
The move from -82 to -107 is significant and worrisome. The European banking system is showing signs of a liquidity squeeze and it is of an obvious that their problems are not going to be resolved. Whether or not Greece actually defaults, the truth is that there will be some serious haircuts that financial institutions will be taking.
From there, the domino effect will flow and the banks around the world will slow lending even more. The outlook for Europe is grim, unfortunately.