Greece has a 98 percent chance of defaulting on its debt in the next five years as Prime Minister George Papandreou fails to reassure investors his country can survive the euro-region crisis.
“Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event,” said Peter Tchir, founder of hedge fund TF Market Advisors inNew York. “Clearly this austerity plan is not working.”
It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA.
German Chancellor Angela Merkel said she won’t let Greece go into “uncontrolled insolvency” as politicians try to limit contagion to other euro members. Papandreou’s pledge to adhere to deficit targets that are conditions of the European Union and International Monetary Fund’s bailout were undermined by data showing Greece’s budget gap widened 22 percent in the first eight months of the year.
The default probability for Greece is based on a standard pricing model that assumes investors would recover 40 percent of the bonds’ face value were Greece to fail to meet its obligations.
The nation’s government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission, as austerity measures deepen a three-year recession. Papandreou approved new measures to help repair thebudget deficit at the weekend amid building resistance from Greeks.
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