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The next Greek tragedy: default or bail-out?

By Aaron Smith, CNNMoney.com staff writer


NEW YORK (CNNMoney.com) -- Greece is in danger of defaulting on its national debt as its bond market comes under increasing pressure, unless its European neighbors intervene.

Analysts believe that the shape of Greece's fiscal future - default or bail-out - could be decided in the coming days.

"We think an intervention over the weekend is a distinct possibility," wrote Stephane Deo, a UBS analyst based in London, in a note to investors.

He said that the falling price of Greek bonds "means that an external intervention may be unavoidable and could happen very soon as the situation is untenable."

He added that a cash injection from the International Monetary Fund is the "most likely scenario" and would solve the country's liquidity problem, at least for now.

Meanwhile, Fitch Ratings cut Greece's credit rating by two notches Friday to the lowest rating for potential investments. A lower grade would categorize Greece's debt with junk bonds.

Fitch noted that the outlook for the debt-challenged country remains negative given the "ongoing uncertainties about the government's financing strategy in the context of increased capital market volatility."

Greece has been suffering from a stagnant economy and excessive debt, which has pushed its bond prices down, and their yields up. The country has earned the dubious distinction of being the most fiscally troubled among a group dubbed the "PIIGS" of the European Union, which include Portugal, Ireland, Italy and Spain.

Nick Stamenkovic, a fixed income strategist at RIA Capital Markets Ltd in Edinburgh, Scotland, said that the spread between 10-year bonds from issuers Greece and Germany -- the benchmark of European stability -- has risen to the "all-time high" of 440 basis points.

It won't be easy for Greece to win support from its neighbors, particularly the Germans, he said, despite the recent admonition from European Central Bank president Jean-Claude Trichet that default is not an option.

Stamenkovic said that Germany is "playing hardball because its pandering to the needs of the domestic audience."

But if Greece doesn't get outside support in the next few days, it could have a hard time issuing more bonds next week in the face of "investor fatigue," he said. He added that investors are "sitting on the sidelines" rather than taking advantage of the falling prices.

"Basically the market is betting that Greece is going to default," he said. "[Investors] are pushing Greece to the brink." To top of page

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