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The Greek default is getting closer. German chancellor Angela Merkel is beginning to prepare the public for a default in Greece, as multiple issues mount on the debt laden country. Here are 5 developments that signal the upcoming default

As the market is fully geared after the holiday, there are many fresh signs that a default for Greece is coming soon.  A default in one Euro-zone country could have a devastating impact on other EZ members and the global economy, making the collapse of Lehman look like a small bump.

Here are the signs:

  1. Greek 2010 budget deficit higher than expected: The Euro-zone’s countries published deficit rates for 2011. Greece hit 10.5%, much higher than 9.6% that was expected. Getting out of the vicious cycle? Not so soon. This is not the firs time that the deficit is higher than expected in Greece.
  2. CDS on Greek debt soars: Credit Default Swaps on Greek debt are at 1345 points, reflecting a 66% chance of a default within the next 5 years. That’s a good chance.
  3. Spanish Auction yields higher yields: The fresh Spanish auction resulted in higher yields, showing that fear about debt is spreading to the Euro-zone’s key country – a country too big to fail. Spain has recently regained trust, but it’s vulnerable to contagion.
  4. Greek yields soar: . 10 year yields  are at around 15.5%. 2 year yields are even higher, close to 24%. Fresh records are reached every other day, but now it’s clear that there’s just no one willing to but Greek paper.
  5. Merkel getting ready for a Greek default: Keeping the best for last – Senior economic adviser to the German chancellor, Lars Feld, said that “he can’t see Greece avoiding restructuring”. He also said that there’s no agreement on this in Germany and within the ECB, but that it won’t hurt the German banks too much. It seems that Merkel is getting the public ready for such an option by sending her close team member to ease the fear of the risk for German banks, and testing it carefully by saying that it isn’t desired yet. Feld, on Team Merkel, wouldn’t say that a “restructuring is unavoidable” without approval from his boss.    The way I see it is that she is sending a message to the public through Mr. Feld.

These are all significant signs.

EUR/USD now trades at 1.4610 after falling from the 1.4650 resistance line. The market isn’t too worried about it. Not at the moment. It’s important to remember that debt issues exist also on the other side of the Atlantic, with the US rapidly marching towards the debt ceiling.

Do you think that a restructuring / default is avoidable? Will Greece take the Euro down? Or is it already priced?

For more technical analysis and upcoming events, see the EUR/USD Forecast.

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