You will be hearing much today about the Greek bailout. However, not much has actually been solved. It appears from the press conference last night that there will be a 50% haircut on certain Greek sovereign debt and the rescue fund (EFSF) can be levered up to $1.4 trillion or 1 trillion Euros.

Don’t be fooled though as the larger debt crisis is far from over. For instance, even with the 50% writedown of the value of Greek government bonds, they will still have a debt-to-GDP ration of 120% by 2020! The debt markets have been pricing a ‘credit event’ in Greece for nearly 18 months. We would not be surprised to see even greater losses taken on Greek bond holdings. Also, what does this mean for all of the buyers of credit default swap (think of this as insurance against default)? Was this a trigger event? If not, this market will suffer.

Also, according to Larry McDonald, there is $260 billion of Greece government bonds maturing between now and 2035. Thus a 50% haircut equates to a $130 billion in losses. These losses will have wide ranging ripple effects on the pensioners in Greece (leading to more social acrimony) and the banks who hold the debt (suffering capital losses).

Finally, before the EFSF can be tapped, European banks will first have to tap the capital markets to raise additional cash. With the capital markets virtually closed in the Eurozone and the area on the precipice of a recession, it will be very difficult to raise funds by issuing stock or debt.

If that does not work, they will then turn to their own governments for a bailout. Lastly, if that phase is not successful, the EFSF is the last resort. All the while, leaders are going to attempt to convince the IMF to contribute to the bailout fund. Here’s the rub: the US contributes 17.7% to the IMF versus China at 4%. We may be on the hook for another bailout. Stay tuned! {TJM}

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