Greek Tragedy's Next Act - by Emre Deliveli

The Greek fiscal tragedy playing across the Aegean has turned into a daytime soap opera in the past couple of weeks. First, a European Commission report condemned the Greek authorities for falsifying budget data. Little surprise that Greece's Stability and Growth Program, released a couple of days after the EC condemnation, was not taken seriously by markets. The climax was reached last week, as Greek credit-default swaps, which insure against default, hit a record of 358 basis points.

Monday’s first scheduled bond issue of the year for the Greek government quelled worries a bit, as investors flocked to the generous yields of 6.2%, which is 0.3% above the country's existing debt with similar maturities.

It is these structural problems and the lack of monetary policy or exchange-rate devaluation as policy options that have left the Mediterranean quartet of Portugal, Italy, Greece and Spain, the so-called PIGS, and to some extent Ireland, with messy budgets. However, Greece stands out from the crowd by having both a high deficit and a large debt-to-GDP ratio.

To predict how this drama will conclude, recall how the Greeks came to this fiscal mess. Some of Greece’s woes are common to the euro zone, suffering from a currency union that has tighter monetary policy than the other major economies and a currency that is overvalued.

For the complete report: Greek Tragedy's Next Act - Forbes.com