A yield of 172% means that bonds issued by Greece are worth just a few pennies more than the paper they're printed on. Put another way, Greece is dead bang certain to default on its debt.
European banks loaned Greece hundreds of billions of Euros -- the reasons don't matter at this point -- and were issued bonds in exchange for the money. The money's gone, spent on heaven knows what. And Greece is bankrupt, trying to make ends meet by laying off its bloated public sector union bureaucracy. That's why riots are occurring there on a near-daily basis.
Germany is considered the bulwark of the European banking system. But even Germany's most august financial institutions are up to their eyeballs in bad debt. For instance, Deutsche Bank alone has Є3.6 billion of debt issued by Greece (PDF).
Greece owes its creditors an amount equal to 162 percent of its entire gross domestic product (GDP, or the annual output of its economy). Without repealing the laws of mathematics (or Paul Krugman's alien invasion force dropping gold bars on Athens), there is no possible way this debt can be paid off.
The reason for the crisis boils down to this: the banks know they are going to take a horrific beating on their crappy investments (like debt issued by Greece). And they are doing everything possible to avoid recognizing those write-downs, because they do not have the requisite capital to continue operating normally if they do. Deutsche Bank's CEO, for example, is reported to be fighting even a 50% "haircut" (loss) on the Greek debt. But knowledgeable analysts say that a 50% markdown won't be nearly enough.
Worse still, there is the real possibility of "contagion". German banks aren't the worst offenders when it comes to exposure to Greece. French banks are in terrible shape, despite today's protestations by the governor of the Bank of France that "all is well". French institutions have suffered a series of downgrades over the past several months as their vulnerabilities became more evident. That is, to everyone except the governor of the Bank of France.
Oh, but I haven't even gotten to the worst part. Greece is only the beginning of Europe's debt insanity:
European banks have total exposure of $998.7 billion to Italy, $774 billion to Spain and $532 billion to Ireland versus just $162.4 billion to Greece.
Talk of a rescue package for Greece -- which hasn't yet been finalized because no one wants to pony up -- doesn't even contemplate much larger defaults like those of Spain and Italy. Yields on Italian 10-year bonds are now nearing the deadly 6 percent mark, which signal weakening confidence in that country's ability to make good on its debts.
Riots are underway in Italy this week to protest the government's handling of the financial crisis.
This is only the beginning of the shakeout. The worst has yet to unfold.
The European socialist welfare states are collapsing before our eyes. What we are seeing in Europe is a preview of the Obama-Democrat agenda writ large. Socialism can't work, won't work, and has never worked in all of human history.
2012 may very well be our last chance to save this precious Republic.
You and I have a rendezvous with destiny. We will preserve for our children this, the last best hope of man on earth, or we will sentence them to take the first step into a thousand years of darkness. If we fail, at least let our children and our children's children say of us we justified our brief moment here. We did all that could be done. --Ronald Reagan