The market rally in response to the European bailout of Greece seems a bit premature, if not overdone.
To their credit, unlike in the US where banks were made whole for their losses, European leaders reached a compromise where bondholders and Greece both took losses. To be fair, in the final accounting, so will the general populace of Europe, to some degree. So it was kind of a shared pain with some of the sharing designed to come later.
Banks that are holding the majority of the bonds have to first eat 50% of the value of those bonds and then raise a lot of capital in part to cover this shortfall.
Unfortunately, the fix solved very little.
Some losses were recognized, but the main conditions that led to ‘too much debt’ being accumulated remain in place. In order to remedy that part of the problem, really spectacular austerity will have to be implemented, and this will drag down the very economies needed to support the remaining debt.
Consider that the deal was struck in such a way as to avoid the bond losses being identified as a default event – one that would trigger credit default swap (CDS) payouts. While I haven’t read the precise language of even one CDS contract to know if this is a legally workable action or not, the impact is not all that hard to discern. Holders of CDS paper now know that it is not worth very much, if anything at all. This will help to drive up the rate of interest on sovereign bonds, because anything that cannot be insured and carries risk commands a lower price than something which can be insured.
Imagine two houses right next door to each other in a flood plain. Identical in every way, one has a full insurance policy that will pay the full price of rebuilding in the event of a flood and the other has a policy that you (now) know will not be paid out. All other things being equal, which house do you prefer? If it’s the fully insured house, you share the same preference with all the other buyers out there, which means the insured house will be in higher demand than the effectively uninsured house. Higher demand = higher price and lower demand = lower price.
by kugscheese 
