U.S. markets sold off Tuesday amid fears of European debt defaults. On Wednesday, news that Greece's economy shrank by 1.8% in the second quarter didn't help ease those concerns.

Back in June, Greece was the center of a potential default crisis. The European Central Bank was forced to provide the member country with $140 billion in bailout funds. The bailout was orchestrated with the International Monetary Fund. Under the terms of the agreement, Greece was forced to impose austerity measures such as cutting public sector expenditures.

So you thought the sovereign debt crisis in Europe was over? Wrong. For the past two months we've had a temporary respite. The euro rose and we got a nice warm and fuzzy feeling. But now the problem is back.

According to Bloomberg Markets Magazine's October issue, even though Europe did stress tests on their banks, there is still concern that one or more countries could default. Banks hold sovereign debt bonds from many different countries. That is putting pressure on all eurozone banks.

A default by Greece could trigger the collapse of banks with large holdings of Greek debt. Europe's largest banks hold €134 billion in Greek, Portuguese and Spanish government bonds.

Will Greece be able to pay an estimated €340 billion or $431 billion in debt in 2013, post intervention, up from the current €270 billion or $342 billion today?

The calculation here is that Greece, which is presently dependent on International Monetary Fund assistance to meet its obligations, will be able to do it, but it will be a close call.

Investors presently demand about 10.6% from Greece to borrow money for 10 years, while fellow eurozone nation Germany, obviously in a magnitude better fiscal position, pays 3.35%. In contrast, the United States pays just 2.56%.

The cost of protecting Greek government debt from default rose to a record, Bloomberg News reported last week. According to CMA DataVision there is now a 68.5% of default. Greece's probability of default rose from 48.5% on June 15 when Moody's downgraded Greek debt to junk.

The main fear is that the imposition of austerity programs throughout the eurozone will hamper growth, especially for weaker countries like Greece. CMA estimates that holders of Greek debt could end up with only 50 cents on a dollar.

AFLAC (AFL - option chain) shares are rising today after the company announced this morning that it has sold all its holdings of Greek sovereign debt and reduced exposure to hybrid securities, a move which assuaged investors' fears that the company was exposed to too many risky assets. Also in the announcement, AFL reiterated its growth forecast of 9-12% for this year. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on AFL.

AFL opened this morning at $44.12. So far today the stock has hit a low of $44.07 and a high of $46.20. As of 12:20, AFL is trading at $44.98 up $1.39 (3.2%). The chart for AFL looks neutral and S&P gives AFL a neutral 3 STARS (out of 5) hold ranking.

Thursday's good new data point comes from the International Monetary Fund, which said Greece's budget deficit reduction plan and economic overhaul appears to be on-track.

The IMF termed fiscal developments as "positive with central government revenue coming in closely as expected" and with expenditures under control.

The group also said pension reform has advanced and an agreement has been reached on many key parameters as outlined in the memorandum or understanding. Structural reforms are also progressing, including in the areas of local administration, privatization, labor market, and tax administration.

Spanish banks are scrambling to borrow record amounts from the European Central Bank (ECB) for fear that they will not be able to borrow from international capital markets.

Last month, Spanish banks borrowed 85.6 billion euros from the ECB, double the amount borrowed during the Lehman collapse, and amounting to 16.5% of all loans granted by the ECB. This is the highest amount since the launch of the eurozone in 1999.

Japan's new prime minister, Naoto Kan, in his first major speech since taking office, said: "Japan is 'at risk of collapse' under its huge debt mountain."

For the past 20 years, Japan has been borrowing to keep its economy afloat. Most of Japan's bonds have been bought by Japanese citizens. Now with an aging population, Japanese citizens may not have the desire to purchase more bonds. The government would be forced to find other buyers who, most likely, would demand a higher yield.

Two steps forward, one step back regarding Europe's debt crisis. Just when it looks like the debt crisis will be contained, and credit markets will start to normalize, one of the world's leading bond managers sees more problems ahead, in a year or so.

PIMCO's Bill Gross, who heads the world's largest bond fund, said a debt restructuring for Greece is all but inevitable, later if not sooner.

"The growth required in order to shoulder Greece's debt burden is so excessive and the fiscal restrictiveness being imposed on the country is so restrictive they there will be no way out," Gross told Bloomberg News Wednesday.

New York University professor Nouriel Roubini, often dubbed Dr. Doom, has given his analysis of the financial issues in Greece and Europe, and I am not sure that his comments are welcome. Roubini told the BBC that the crisis is "not over" and that the situation in the eurozone "is a second stage of a typical financial crisis."

Roubini noted that the EU's rescue package has not calmed the markets and he worries that the governments are not "strong enough to implement the austerity measures required."

Last weekend French President Nicolas Sarkozy reportedly threatened to pull France out of the euro-zone if Germany did not agree to a comprehensive stabilization package for Greece, Agence France-Presse reported Friday, citing Spain's El Pais.

Spanish Prime Minister Jose Luis Rodriguez Zapatero reported Sarkozy's remarks to a meeting of leaders of his Socialist Party on Wednesday. However, a government source in Madrid denied the Sarkozy incident, telling the AFP that it is "lacking in any foundation."

Oil prices continue their decline, falling today to levels not seen since mid-February.

Concerns continue to linger about the economic situation in Europe, which has been giving the U.S. dollar a major boost, driving oil lower. Oil fell $1.25 a barrel today to $74.40.

There are plans in place to combat the crisis in Greece, but experts are skeptical that the $1 trillion package and additional austerity measures will be able to completely correct the debt problem the country is experiencing.

There's another positive data point in the campaign to check contagion and keep credit markets liquid.

The European Central Bank's intervention to buy the government debt of Greece, Spain, Portugal, Italy, and Ireland has apparently started to bolster investor confidence, Bloomberg News reported Thursday. Central banks of Germany, France, and Italy also intervened.

One of the world's leading economists is applauding Europe's leaders and other leaders for their unprecedented action to stabilize Europe's public finances, but is also cautioning that much real work remains.

Economist John Lipksy, first deputy director of the International Monetary Fund, told Bloomberg News Tuesday Europe's decision to commit up to $1 trillion in loans and guarantees to help debt-plagued countries transition to sustainable fiscal budgets, "is an important step" but added, "Now let's see what happens in other countries that need to undertake adjustment programs."

Today's market fear was that the $1 trillion E.U. bailout is a bandaid over an open wound, rather than a cure. In short, the problems remain but more money is thrown at them. Traders spent most of the day playing tug of war all of the way down to the closing bell wire today.

Here were the unofficial closing bell levels:

Dow 10,748.26 -36.88 (-0.34%)
S&P 500 1,155.79 -3.94 (-0.34%)
Nasdaq 2,375.31 +0.64 (0.03%)

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