The Greek crisis dominated the international news last week, but in the end German Chancellor Angela Merkel caved in and abandoned her hard-line stance, allowing a rollover of Greek debt to private creditors. The reason that Ms. Merkel was playing hardball is that German citizens are furious that their taxes keep rising to bail out Greece, making any further bridge loans to Greece politically risky.

Yields on 2-year Greek debt exceeded 30% last week, so a rising fear of default is already priced into the bonds. Furthermore, other EU members with high and rising debt loads - like Ireland, Portugal, Spain, Italy, Belgium and even France - could follow Greece's lead, making further euro-zone defaults possible.

Greece's unemployment rose to 15.9% in the first quarter, up from 14.2% in the fourth quarter and 11.2% in the first quarter of 2010, so it appears that Greece's austerity measures are only resulting in rising unemployment, causing citizens to become even more unruly. The real problem is that, as Greek interest rates rise, it takes even more drastic austerity cuts to try to finance those crippling 30% interest coupons.

Complicating matters for Greece, Standard & Poor's Rating Service downgraded Greece's debt three notches, from B to CCC, effectively dropping it to the bottom of the 131 countries with sovereign debt ratings. (Moody's and Fitch have also downgraded Greece in recent weeks.) This ultra-deep "junk" rating is astonishing, since Greece had an "A" rating from the folks at S&P as recently as January 2009. Even worse, S&P said that the likelihood of a Greek default is "significantly higher" over the next year.

As a result of the latest Greek crisis, the euro had its worst week since 2009. However, the euro seemed to stabilize on Thursday and Friday after EU officials expressed confidence that a new rescue package would seek to arrange another bridge loan, or restructure Greece's debt with the aid of private investors.

Stat of the Week: Inflation Dips to 0.2%

On Tuesday, the Labor Department reported that the Producer Price Index (PPI) rose 0.2% in May, the smallest gain since July of 2010. The core PPI, excluding food and energy, also rose 0.2%. The most dramatic change was a 40% decline in the price of vegetables, causing wholesale food prices to fall 1.4%, the biggest decline in a year. Wholesale energy prices rose 1.5%, but that was the smallest monthly gain since last September. Due predominately to rising energy costs - up 25% in the past year - the PPI has risen by a composite 7.3% in the past 12 months, while the core PPI is only up a modest 2.1%.

Then, on Wednesday, the Labor Department reported that the Consumer Price Index (CPI) also rose 0.2% in May. The core CPI, excluding food and energy, rose 0.3%. In the past 12 months, however, the CPI has risen 3.6%, the fastest annual pace since October of 2008. The best news in the May CPI report was a 2% decline in gasoline prices, causing energy costs to decline 1%. Due to a 0.4% rise in food prices, these lower energy prices were masked, but Wall Street was encouraged that energy prices finally fell.

Inflation is down, in part, due to slower demand. On Tuesday, the Commerce Department said that May retail sales fell 0.2%, the first monthly decline after 10 straight gains. However, economists had expected a decline of 0.7%, so a 0.2% drop was encouraging. Excluding a 2.9% decline in vehicle sales (the largest drop in 15 months), May's retail sales were actually UP by a net 0.3%. These figures tell me that high gas prices are causing consumers to shy away from buying new vehicles and to plan fewer shopping trips.

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