Greece Hopes the Market Can Fix Its Debt Problem

Based on the headlines, you might assume that Greece has solved its debt crisis by turning to the bond market to borrow more money. But as all too many serial refinancers across the world know, that strategy works until it doesn't.

It's true, Greece did manage to raise $6.8 billion in an offering that was oversubscribed by a factor of three. But you can sell anything at the right price. According to Bloomberg, the 6.25 percent notes reflect a premium of 293 basis points, or nearly 3 percentage points. And Greece will need to borrow many times that amount over the course of the year.

Investors seem to believe that Greek debt is a good bet because the EU is likely to offer a bailout. In fact, an EU contingency plan is in the works, according to Bloomberg, citing two unnamed sources.

There are two hitches in the plan, though. The EU can't justify a Greek bailout to the citizens of countries such as Germany and France until it sees Greece make a serious effort to bring its debt, now 12.7 percent of the economy, closer to the EU limit of 3 percent. The government of Greece says the majority of citizens support budget cuts, but the increasingly violent clashes between police and protesters are probably a better gauge of public opinion than the latest survey.

Even under the best of conditions, EU support for a bailout is hardly assured. While German Chancellor Angela Merkel has pledged to stand by Greece, her finance minister says no money should go toward a bailout.

Some measure of political force will be required to resolve the crisis in Greece. At a minimum, budget cuts will have to be forced on a population where a substantial number of people are willing to resist them by force, which is no small matter. And the bailout may have to be imposed against the wishes of many other people across the EU. The political consequences of the Greek credit crisis could be significant.