By now, most investors understand that the crisis in Greece is potentially very serious, and staying current on the European sovereign debt situation is imperative.  In today’s Wall Street Journal there is a story about Greece’s next bond sale which will be put to the market in the next few days.  Apparently, Greece’s financial leaders are prepared to offer up to 5 billion euros ($6.8B) of 10-year bonds, which will test the market’s willingness to sop up the troubled nation’s debt.

If successful, the offering could help soothe bond markets across Europe, which remain jittery weeks after the crisis over Greece’s finances first flared.

But if the new bond issue falters, European Union leaders could be forced to decide whether a bailout of Greece is needed.  If Greece fails to raise the money quickly, it would spread doubt about its ability to pay off billions of euros coming due in the next few months.  That, in turn, has the potential to spark a financial contagion that would include bond losses and decreased lending in southern Europe…

European Union leaders have said the 16-nation euro zone would support Greece if the country’s budget situation destabilized further.  But European finance ministers said that Greece first must narrow its budget gap before aid is discussed in detail.  Greece faces a March 16th deadline to show progress. — The Wall Street Journal 2/19/2010

We were surprised to see this large of a debt offering after last month’s even larger bond sale which has many investors steaming already.  Greece offered a 6.1% interest rate on an 8 billion euro sale of five year bonds, and investors flocked to the offering and its seemingly attractive yield.  However, the offering was so large that there was little demand for Greek debt remaining and prices slipped 3.5% in just two days.  Now, less than a month later Greek officials want to offer another 5B euros to the market?  They must be planning to offer some impressive rate in order to drum up enough demand this time around.

Clearly, Greece is in a difficult spot and they must raise a lot of money quickly as 20B euros of debt are coming due by April.  However, it is obvious that they have gone on too long borrowing from tomorrow to pay off today; they must make massive budget cuts and soon.

In my opinion, a rigorous plan of action to cut spending would be the best way to attract investors and make them believe these new bonds are worthwhile.  Cutting spending will likely come with dire challenges like work stoppages and other forms of civil unrest, but that it what must happen to right the ship.  Maybe I underestimate the risk appetite of the market, but why would anyone buy this debt (even at a higher rate) without evidence of a way forward.  EU members, who would be responsible for bailing out Greece, have demanded budget cuts, might the market join in on those demands by shunning Greece’s next debt offering?

More Greek Debt Won’t Smooth Over the Crisis