Greek implied default probabilities

I ran across an article by John Hussman that illustrates the probability of Greek bond defaults (based on what the bond market yields imply):

(source: "Greek Yields: 'Certain Default, But Not Yet'" by John P. Hussman, Hussman Funds Weekly Market Comment, June 20, 2011)

From the article,
First, even with yields on short-term Greek bills pushing toward 20% annualized, the implied probability of a near-term default is very low. Indeed, the only way that Greek yields would be consistent with even a 50% chance of default in the next 3 months is to assume a 95% recovery rate. That sort of default is highly unlikely, because it would do nothing to materially alter the overall debt burden. For plausible recovery rates, the implied probability of a near-term Greek default is less than 7%. Simply put, despite the strained political and social situation in Greece, the bond market is demonstrating very little concern about a near-term default. At the point that a near-term default becomes likely, we would expect to see one-year yields spiking toward 40% and 3-month yields pushing past 100% at an annual rate (essentially pricing near-term bills toward the anticipated recovery rate).

This temporarily reassuring situation, unfortunately, strongly contrasts with the longer-term outlook for Greek debt. Even assuming a 60% recovery rate (that is, assuming a default would wipe out 40% of the Greek debt burden), the implied probability of a Greek default within the next two years is effectively 100%. The only way you get a lower probability is to assume a far lower recovery rate.

...From a time perspective, the only way Greek yields are consistent with less-than-certain default by the end of 2013 is if we assume recovery rates of less than 60%.

This is kind of surprising to me. Given the news and chaos over the numerous strategies being proposed by European governments, I would have thought a near-term default was likely. Yet it seems the bond market isn't expecting a default within 3 months.

The bond market isn't always right but if it is, then the Greek problems will stretch well into next year. Anyone looking for a quick resolution probably won't see one. I don't think a Greek default in and of itself is a big deal. Greece is a small country and the amount of exposure is manageable. What is scaring bond investors, I suspect, is the possibility of setting a precedent. If Greece defaults then others, like Ireland, Portugal and possibly Spain in the worst case, may do the same. It's also not clear what it means to default: can a country just walk away from the Euro? Can it print its own currency? Can it run two currencies at the same time?

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