Euro Area Under Massive Speculative Attack

After Greek debt was downgraded to junk by Standard & Poor’s yesterday, and Portugal’s debt was kicked down two notches, there’s nearly panic among international bond investors Wednesday. The yields on the Greek two-year note soared to almost 19%, while yields on the 10 year actually fell, which means that markets are now speculating on a default. Portugal’s two-year yield jumped to 5.7%. Credit default swaps climbed 111bp to 821for Greek bonds and 54bp to 365 for Portugal. The crisis is now worsening and spreading at the same time.

“The only plausible outcome is where Greece does not default unilaterally but adjusts, most likely with restructuring of its debt, where the euro area offers financial support with tough conditionality”.

Willem Buiter

Standard & Poor’s warned that holders of Greek debt might recover only 30%-50% of their investment in the event of a debt restructuring. If other rating agencies were to follow, Greece stands to lose its capability to raise liquidity with the ECB.

The Greek news paper Kathimerini writes that the negotiations between Greece, the IMF and euro area members to be complete within the next days and that they then expect borrowing conditions to normalize.

The editorial in Kathimerini writes that to restore credibility, the Greek government needs to explain to the Greek people that there is no other solution.

Externally, the credibility would be restored when the prime minister demonstrates a serious team, who without calculating the political costs will do what it takes to save the country.

ECB chairman Jean Claude Trichet and IFM chief Dominique Strauss Kahn have Wednesday descended on Berlin for emergency talks with Germany’s chancellor.

A clear announcement from Berlin is now needed, or else the crisis might engulf the entire euro area.

How Much Money Does Greece Need?

Market participants suggest that Greece might need €90bn in loans (an estimate that seems to escalate by the day), but numbers emanating from talks within the euro area were only half that amount, making some investors wonder whether IMF and the E.U. countries were actually serious about preventing a default, The Financial Times writes.

But the numbers that emanated from talks within the euro zone were only about half that number, making some investors wonder whether the IMF and the euro zone countries were actually serious about preventing a debt default, FT points out.

Having spent the IMF meetings last weekend fiercely denying they were even contemplating allowing default, euro zone finance ministers and the IMF appear to have started to validate the original rumors about the size of the lending package.

“Greece needs €150bn just to roll over debt for the next three years, so they need at least half of that even as a starting point if they want to make an impact,” says one hedge fund manager.

Economists at Barclay’s Capital calculate that Greece has financing needs of about €70bn this year to finance debt coming due, pay interest on existing debt and fund its primary fiscal deficit (the deficit without interest payments), likely to be about €10bn.

The financing needs next year would drop only slightly to €60bn and then to €56bn in 2012.

Barclay’s Capital tabled the refinancing requirements over the next three years with €186bn.

Pressure on E.U. Increase Further

Pressure on EU policy makers is intensifying as Portugal’s stock index plunged and risk premium on Italian and Irish bonds rose to a 10 month highs.

Bloomberg writes that the danger is that the Greek crisis is spinning out of control.

The MSCI Asia Pacific Index declined 1.6 percent to 125.12 at 11:43 a.m. in Tokyo after U.S. stocks had the biggest decline since February.

The cost of protecting Asian bonds from default surged to the highest in two months.

The euro was at $1.3207, after earlier dropping to $1.3145, the least since April 29, 2009.

Standard & Poor’s 500 index futures were little changed.

There are no concrete plans of how to help other nations than Greece.

“People are panicking about the contagion effect,” says Sydney-based Simon Bonouvrie, who helps manage $1.7 billion at Platypus Asset Management. “It’s an overreaction but the risk aversion will remain until these problems are resolved.”

FT Deutschland writes that difficulties of Portugal only show the damage done by the week-long back and forth about the rescue package.

Portugal has a public debt similar to France, but together with private sector the combined outstanding debt is 236%, which is more than Greece or Italy.

There are also first signs that the Greek crisis could even have an impact on the global economy.

After the Greek downgrade from S&P, the VIX index, the U.S. volatility index, rose by more than 30%, the biggest jump since the height of the financial crisis in October 2008.

The Financial Times writes that this highlights investors fear that the Greek crisis could have knock-on effects on the global economy.

Financial Times also reports that the IMF now looks at raising its share in the Greek rescue package by €10bn amid fears that those €45bn will fail to prevent default.

On Wednesday Greece’s securities regulator banned short-selling in shares on the Athens bourse until June 28 after investors responding to the country’s deepening debt crisis ditched Greek assets a day earlier.

“The Capital Market Commission, having considered the extraordinary conditions in the Greek market, has decided to ban short selling on the Athens stock exchange. The rule will be in effect from April 28 until June 28,” it said.

German Politicians Seem To Push For Greek Default

In Germany meanwhile, political parties still seem not yet have grasped the urgency for action.

FT Deutschland reported that the SPD signaled their readiness for negotiations in the second week of May, on the condition that the loans will be part of an ordinary legislation process.

The CDU parliamentary leader said they expect the government to verify how the private sector could participate in the effort. The liberals also want a contribution from insurances and pension funds.

Calls for private sector contribution are also intensifying, according to Spiegel online.

According to the Frankfurter Allgemeine, the German finance minister Wolfgang Schauble have already handed out the draft legislation to the parliamentary leaders.

Schaeuble assured that there will be an ordinary legislation process to be concluded directly after the elections in North Rhine Westphalia.

Willem Buiter, chief economist of Citigroup, argues that “the only plausible outcome is where Greece does not default unilaterally but adjusts, most likely with restructuring of its debt, where the euro area offers financial support with tough conditionality”.

He also argues that the Greek experience can provide a blue print for a European monetary fund  that provides mutual fiscal insurance and Financial Recapitalization Fund (FIRF) or recapitalize cross border financial institutions.

Both institutions could be operational within a couple of years without treaty change, Buiter writes in a blog post at FT Alphaville.

“The Greek crisis and the other unresolved sovereign debt problems in the Euro Area have made manifest a serious design flaw at the heart of the Economic and Monetary Union: the absence of even a minimal ‘fiscal Europe’ to complement the monetary union. This black hole at the center of the EMU has not led to serious problems before because of the extraordinarily benign global and European macroeconomic climate since the inception of EMU in 1999. This ‘Great Moderation’ came to an end in August 2007, but the fiscal implications did not become clear until late 2008 and 2009,” Willem Buiter writes.


These snap shots from the European markets at noon Wednesday doesn’t need any commentary – they speak for them self:




The German DAX Index at Deutsche Boerse in Frankfurt:

The price of gold in Europe right now:

Related by the Econotwist:

“Germany Is Unfit For The Euro”

Greek Crisis Force Germany To Put Help For Unemployed On Hold

The Great Greek Soap Opera

Markets Still Don’t Trust Europe’s Greek Aid Pledge

Germany Forced To Accept Greek Bailout

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