Europeans Fear Greek Debt Crisis Will Spread

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Eigenlijk wel grappig.
De USA Senaat voert een publieke oorlog tegen Goldman Sachs en
ondertussen wordt er voor een enorme onrust op de geldmarkten gezorgd.

Wie gaat daar van profiteren?
Juist ja ;)
De bonussen voor de rest van het jaar worden NU verdient, dankzij de onrust.

Groet / Cees

April 28, 2010
Europeans Fear Greek Debt Crisis Will Spread
http://www.nytimes.com/2010/04/29/business/global/29euro.html
By LANDON THOMAS Jr.

As Greece inches closer to the brink of financial collapse, fear that
the debt crisis will spread is engulfing Europe.

Increasingly, investors wonder if Portugal, Spain and even Ireland may
not be able to borrow the billions of dollars they need to finance their
government spending.

“It’s like Lehman Brothers and Bear Stearns,” said Philip Lane, a
professor of international economics at Trinity College in Ireland,
referring to the Wall Street failures that propelled the financial
crisis of 2008. “It is not so much the fundamentals as it is the
unwillingness of the market to fund you.”

A major ratings agency cut Greece’s debt to junk level on Tuesday,
warning that bondholders could face losses of up to half of their
holdings in a restructuring. The agency also downgraded Portugal’s debt
by two notches.

The news rattled markets around the world, with the Dow Jones falling
1.9 percent, although they began to calm on Wednesday.

Japan’s Nikkei index was down 2.6 percent, while the Hang Seng index in
Hong Kong was down 1.3 percent. In early trading Wednesday, the Euro
Stoxx 50 index, a barometer of euro zone blue chips, was down only 0.7
percent, a day after it had dropped 3.7 percent. The FTSE 100 index in
London fell 0.3 percent after falling 2.6 percent Tuesday.

The euro regained some ground, rising to $1.3209 from the 2010 low of
$1.3175 reached on Tuesday.

The downgrades, by Standard & Poor’s, pushed up the interest rates that
Portugal must pay on its 10-year bonds to a high, and Spain’s costs
rose, too. Investors are already demanding nearly 10 percent in returns
on Greek’s 10-year bonds. The cost of insuring all three countries’ debt
against a default are also at record levels — a clear sign that
investors are shunning them.

“The situation is deteriorating rapidly, and it’s not clear who’s in a
position to stop the Greeks from going into a default situation,” said
Edward Yardeni, president of Yardeni Research. “That creates a spillover
effect.”

The problem is that it is not just Greece, which expects to receive
international aid, but Portugal, Spain and other countries that must
issue more debt soon.

“Spain has to issue new debt plus roll over existing debt,” said
Jonathan Tepper of Variant Perception, a research group based in London
and known for its bearish views on Spain. “So they are dependent on the
kindness of strangers.”

Countries the world over sell bonds, which help cover the costs of
things like social services and government workers’ pay. In developed
countries, this debt is considered relatively safe because governments
can raise taxes or fees to pay their debts. But government revenue has
dropped sharply during the recession, and levying higher taxes risks
further slowing the economy.

With European budget deficits worsening, investors are now worried that
— like American homeowners who borrowed too much in the last decade —
some countries may have a hard time paying off their debts.

As economic growth picks up, the financial pressure should ease.
Officials from the Greek finance ministry and staff from the
International Monetary Fund are racing to conclude aid for Greece by May
19, a crucial date for its refinancing efforts.

To some extent, Europe’s paralysis in dealing with Greece is driving the
unease and highlighting political divisions within Europe. Each step
toward additional support for Greece has appeared to be too little too late.

The latest proposal, a 45 billion euro package by Europe and the I.M.F.,
has done little to calm the markets, and Germany’s statement this week
that it must first see more deficit reduction from Greece before
fulfilling its pledge has only increased concerns that Europe is not
united behind Greece.

Kenneth Rogoff, a former economist for the I.M.F. who has studied
sovereign defaults, calls the latest assistance package puzzling. “They
put their wad on the table, but they could have gone further,” he said
of the international plan. “I never thought Europe could take the lead
on this.”

As the European Union and the I.M.F. debate the politics of Greece’s
laying off civil servants or persuading its doctors to pay income tax,
it is becoming apparent that the international community may need to
come up with a much larger sum to backstop not just Greece, but also
Portugal and Spain.

“The number would be huge,” said Piero Ghezzi, an economist at Barclays
Capital. “Ninety billion euros for Greece, 40 billion for Portugal and
350 billion for Spain — now we are talking real money.”

Mr. Rogoff says that the I.M.F. could commit as much as $200 billion to
aid Greece, Portugal and Spain, but acknowledges that sum alone would
not be enough.

In fact, analysts at Goldman Sachs suggest that Greece will need 150
billion euros over a three-year period.

What a growing number of investors suggest is really needed is a “shock
and awe” figure, enough to convince the markets that peripheral European
economies will not be left to fail.

On Tuesday, a vice president of the European Central Bank said that the
euro zone was facing its biggest challenge since the adoption of the
Maastricht Treaty in 1997. Austerity measures in Greece and Portugal are
already causing unrest there. Transportation workers in both countries
protested on Tuesday, leaving train stations deserted because of strikes.

Officials from Standard & Poor’s said the main reason for downgrading
the debt of Greece and Portugal was the prospect that forced austerity
packages would be an even bigger drag on economic growth.

It is the most vicious of circles: stagnating economies are forced to
cut back more, which reduces their ability to generate revenue and thus
pay off their debts. As part of the euro zone, these countries do not
have the ability to print their own money to stimulate growth and
bolster exports, so increasing debt and an increasing prospect of
default result.

Though they are under the most immediate pressure, Greece and Portugal
are relatively small economies.

Given Spain’s size, its debt crisis is seen by many as the looming
problem for world markets. On the surface, its debt load appears
manageable. Its debt relative to gross domestic product, the broadest
measure of its economy, is 54 percent — compared with 120 percent for
Greece and 80 percent for Portugal.

But what Spain does have is the highest twin deficit, or combined budget
and current account deficits, of any country in the world except
Iceland, a reflection of how dependent it is on increasingly fickle
foreign investors for financing. Spain has 225 billion euros in debt
coming due this year — an amount that is about the size of Greece’s economy.

The base of investors willing to invest in the bonds of Spain and other
distressed European countries is dwindling. Some large bond investors,
including Pimco, have said they are not actively buying European debt.
Given the losses that European investors have taken on Greek, Spanish
and Portuguese bonds in recent months, it seems doubtful that such
investors can be relied on to provide the capital these countries need.

Predicting where and when the next ripple will be felt is an inexact
science. During the Asian crisis in 1997, Russia’s debt default took the
world by surprise.

Some even worry that the next debt crisis may materialize closer to home
— in the United Kingdom or even the United States, where budget deficits
and debt burdens are growing. Both countries are now issuing debt at
reasonable levels of 4 percent. The long run of cheap financing may be
coming to an end, though, even for the most creditworthy countries.

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