Greek Default Fears All Over Again

Renewed fears of Europe’s debt situation are expected to remain front and center today. The domestic economic calendar is relatively on thin side today, but we will be getting a host of important economic reports later this week that will give us fresh data points about inflation, retail sales, and the health of the nation’s manufacturing sector.

The CPI report on Wednesday and PPI on Tuesday will be important only in terms of their relevance to incremental easing moves from the Fed. The dissenters within the FOMC don’t appear to be buying into the majority view that the recent heightened inflation readings lack in staying power. The manufacturing read will come through the Industrial Production report for August on Thursday and the Empire State and Philly Fed surveys for September that same day. Importantly, we will get to see if all the turbulence last month had an impact on consumer spending through the August Retail Sales report on Wednesday.

The market will be trying to get a fresh perspective on the nation’s halting economic recovery through these economic reports. But the re-emergence of Greek default fears has the potential to undermine any positive that may come out of these economic reports.

What is new on the Greece front? For starters, they are running out of cash to pay their bills. And they may not be able to get the next tranche of funds from the European bailout fund given their inability to put in place previously agreed-to measures. It is unclear at this stage whether it is a high-stakes poker game between the Greeks and Europeans (read:Germans) or something real. But it has nevertheless renewed default fears. And those fears are putting a spotlight on a number of French and other European banks that have exposure to Greek debt.

The resignation of a senior European Central Bank official on Friday and the lack of direction from the G-7 meeting over the weekend add to the feeling of policy paralysis over the Greek situation. All of this is pushing up the yields on Italian and Spanish government bonds and pressuring down the exchange value of the common currency. Given this uncertain backdrop, it is no surprise that the yield on the 10-year U.S. Treasury bond and the price of gold are in record territory.

In corporate news, McGraw-Hill Companies (MHP) announced its decision to split itself into two separate public companies focused on the education and markets businesses. The company is also accelerating its $2 billion stock buyback program and is committing to repurchase $1 billion by the end of 2011. In major M&A news, Broadcom (BRCM) is acquiring NetLogic Microsystem (NETL) for $3.7 billion that will strengthen the company’s position in offering integrated communications and processing platforms.

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