Greece has a 98 percent chance of defaulting on its debt in thenext five years as Prime Minister George Papandreou fails toreassure investors his country can survive the euro-regioncrisis.

“Everyone's pricing in a pretty near-term default and I thinkit'll be a hard event,” said Peter Tchir, founder of hedge fund TFMarket Advisors in New York. “Clearly this austerity plan is notworking.”

It costs a record $5.8 million upfront and $100,000 annually toinsure $10 million of Greece's debt for five years usingcredit-default swaps, up from $5.5 million in advance on Sept. 9,according to CMA. Greek bonds plunged, sending the 10-year yield to25 percent for the first time.

German Chancellor Angela Merkel said she won't let Greece gointo “uncontrolled insolvency” as politicians try to limitcontagion to other euro members. Papandreou's pledge to adhere todeficit targets that are conditions of the European Union andInternational Monetary Fund's bailout were undermined by datashowing his country's budget gap widened 22 percent in the firsteight months of the year.

The default probability for Greece is based on a standardpricing model that assumes investors would recover 40 percent ofthe bonds' face value if the nation fails to meet its obligations.CMA, which is owned by CME Group Inc. and compiles prices quoted bydealers in the privately negotiated credit-swaps market, loweredits recovery assumption to 38 percent late yesterday, which wouldgive Greece a 95 percent chance of default.

Economy to Shrink
Greece's government nowexpects the economy to shrink more than 5 percent this year, morethan the 3.8 percent forecast by the European Commission, asausterity measures deepen a three- year recession. Papandreouapproved a plan to help repair the budget deficit at the weekendamid swelling resistance from Greeks.

Greece's 10-year bond yield rose 48 basis points, or 0.48percentage point, to 24.03 percent as of 10:26 a.m. in London,after earlier climbing to a euro-era record of 25 percent. Thetwo-year note yield increased 460 basis points to 74.15 percent,after rising to an all-time high 74.88 percent.

Greek stocks fell, with the ASE Index tumbling as much as 1.2percent to the lowest since 1995 and down more than a third fromJuly 22.

The risk of contagion beyond Greece weakened the euro andboosted benchmark German bunds. The common currency fell toward itsweakest level since 2001 against its Japanese counterpart,declining 0.9 percent to 104.68 yen. Bunds rose, with the 10- yearyield falling to a record 1.679 percent.

Sovereign Record
An index measuring the costof default protection on 15 European governments to a record.European bank debt risk also jumped to the highest ever amidspeculation French lenders will be downgraded because of theirholdings of Greek bonds.

The Markit iTraxx SovX Western Europe Index of credit- defaultswaps climbed six basis points to 356, an all-time high based onclosing prices. The Markit iTraxx Financial Index linked to thesenior debt of 25 banks and insurers increased 11 basis points to325, while a gauge of subordinated debt risk was up 20 basis pointsat 570, according to JPMorgan Chase & Co.

“The contagion impact of a default will be severe, because nextin the firing line will be Italy, Spain and it will take in thewhole of the European banking sector too,” Suki Mann, a strategistat Societe Generale SA in London, wrote in a note yesterday. “Thistrio are already under intense pressure, but it will get muchworse.”

Euro-Region Nations
Credit-default swaps onPortugal, Italy, France and Belgium rose to records, according toCMA. Portugal jumped eight basis points to 1,223, Italy rose 16basis points to 522, France was up four basis points at 193 andBelgium climbed two basis points to 299.

Germany's government is debating how to support its nation'sbanks should Greece fail to meet the budget-cutting terms of itsrescue package, three coalition officials said Sept. 9. Merkel saidin an interview with Berlin-based Inforadio that avoiding an“uncontrolled insolvency” was her “top priority” and that theregion's most indebted country is taking the right steps to gettingits next bailout payment.

Credit-default swaps on BNP Paribas SA, Societe Generale SA andCredit Agricole SA, France's largest banks, surged to all-timehighs on bets they'll have their ratings cut by Moody's InvestorsService this week.

French Banks
Swaps on SocGen were nine basispoints higher at 454, Credit Agricole increased 11 to 333 and BNPParibas rose 15 basis points to 320, according to CMA.

Moody's placed the three banks' ratings on review in June toexamine “the potential for inconsistency between the impact of apossible Greek default or restructuring and current rating levels,”the rating company said at the time. Downgrades are likely as thereview period concludes, said people with knowledge of the matter,who declined to be identified because the information isconfidential.

The cost of insuring European corporate debt rose to the highestlevels in 2 1/2 years, according to JPMorgan. The Markit iTraxxEurope Index of 125 companies with investment-grade ratings climbed5.5 basis points to 204, while the high-yield Markit iTraxxCrossover Index added 13.5 basis points to 811. An increase signalsdeclining perceptions of credit quality.

A basis point on a credit-default swap protecting 10 millioneuros ($13.6 million) of debt from default for five years isequivalent to 1,000 euros a year.

Swaps pay the buyer face value in exchange for the underlyingsecurities or the cash equivalent should a borrower fail to adhereto its debt agreements.

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