mick silver
23rd April 2010, 02:18 PM
http://www.washingtonpost.com/wp-dyn/content/article/2010/04/22/AR2010042201464.html ... By Frank Ahrens and Anthony Faiola
Washington Post Staff Writer
Friday, April 23, 2010
The Greek debt crisis escalated sharply Thursday, weakening the euro and sending ominous ripples across a stagnant European economy.
Greece is on the edge of default as talks continue on a $56 billion rescue package from the International Monetary Fund and the European Union that is contingent on Athens taking further austerity measures. Even if the government agrees to more cuts, the rescue continues to face strong opposition from Germany, where the public fears it will have to shoulder an unfair burden in a bailout.
IMF Managing Director Dominique Strauss-Kahn said he is not yet considering a restructuring of Greek debt, but he warned that there is no "silver bullet" to the nation's fiscal woes. He said negotiations on a rescue package will take time, which Greece may not have.
"It's really important to have a quick package in place in Greece," said Astrid Schilo, head European economist with HSBC in London. "Parliament in Germany may have to vote in favor of support, even if the public opposes it. The consequences are too high if it doesn't."
Other large nations, including the United States, that carry increasing levels of debt have worried that the Greek crisis could be a small-scale sketch of their own future. Sovereign debt is coming under increasing scrutiny by global markets, and many analysts fear that U.S. government bonds are not as attractive as they once were.
Wall Street traders have referred to the months-long Greek debt crisis as the "Greece fire": It has been messy, noxious and hard to put out. Each time a solution has appeared close at hand, new revelations emerge from Greece, fanning the flames.
On Thursday, new data showed that the current Greek administration, like its predecessor, had underreported its debt in order to hide problems from outsiders. The European Union's statistical office said the government's 2009 budget deficit was $44.3 billion, 13.6 percent of Greece's gross domestic product, which is significantly higher than the 12.7 percent previously reported. In the United States, the figure is about 10 percent.
The news led Moody's, the ratings agency, to downgrade Greek debt for the second time in five months, saying it fears the financially troubled nation might be forced to continue paying high interest rates that could compound the economic woes. To sell its two-year bonds, Greece is paying a back-breaking 11.5 percent interest rate, up from 8 percent on Wednesday. The cost of insuring Greek debt is approaching record highs.
The revision zapped further confidence in the reliability of Athens's figures. It also suggested that the government would need far more belt-tightening to meet budget targets this year and avoid a default.
"The revised figures are not good news," said Diego Iscaro, an analyst with IHS Global Insight in London. "A higher deficit means that fiscal consolidation will be even more difficult to achieve than previously thought. Moreover, the constant revisions made to the Greek fiscal figures exacerbate the already weak credibility of the government."
The new developments raised the specter of a sovereign debt default in Greece, something that hasn't happened since Russia defaulted on its public and private debt in 1998. A default would lead to a restructuring of Greek debt; that means creditors would be forced to accept a negotiated figure that pays them cents on the dollar, a practice known in the industry as "taking a haircut." Some analysts say this is inevitable.
"Greece's only way out is a debt restructuring, which will include a haircut to bondholders, and that is an implicit default," said Peter Boockvar, an equity strategist at Miller Tabak.
If Greece must restructure, much of Europe will feel the pain, Boockvar said.
"We've seen the cost of capital going up for Italy, Ireland, Portugal and Spain, and banks that hold the debt of these countries will get impacted," he said.
Hampered by high levels of unemployment and government spending, the 16-nation bloc that shares the euro was hopeful of achieving a very modest 1 percent growth in GDP this year, compared with 3.1 percent for the United States, according to the IMF. If Greece defaults, Europe will be hard-pressed to show any economic growth this year. Boockvar said the austerity conditions imposed in a bailout will slow growth for up to 35 percent of the euro zone.
On Thursday, Greece's problems led investors to focus on other deeply indebted nations in Europe. The spread on Belgian bonds jumped after the government of Prime Minister Yves Leterme collapsed. Belgium's budget deficit, at 4.8 of GDP, is far lower than Greece's, but the nation is heavily leveraged, with overall debt amounting to 100 percent of GDP. Analysts remained concerned that the political crisis could further damage the fragile economy.
Washington Post Staff Writer
Friday, April 23, 2010
The Greek debt crisis escalated sharply Thursday, weakening the euro and sending ominous ripples across a stagnant European economy.
Greece is on the edge of default as talks continue on a $56 billion rescue package from the International Monetary Fund and the European Union that is contingent on Athens taking further austerity measures. Even if the government agrees to more cuts, the rescue continues to face strong opposition from Germany, where the public fears it will have to shoulder an unfair burden in a bailout.
IMF Managing Director Dominique Strauss-Kahn said he is not yet considering a restructuring of Greek debt, but he warned that there is no "silver bullet" to the nation's fiscal woes. He said negotiations on a rescue package will take time, which Greece may not have.
"It's really important to have a quick package in place in Greece," said Astrid Schilo, head European economist with HSBC in London. "Parliament in Germany may have to vote in favor of support, even if the public opposes it. The consequences are too high if it doesn't."
Other large nations, including the United States, that carry increasing levels of debt have worried that the Greek crisis could be a small-scale sketch of their own future. Sovereign debt is coming under increasing scrutiny by global markets, and many analysts fear that U.S. government bonds are not as attractive as they once were.
Wall Street traders have referred to the months-long Greek debt crisis as the "Greece fire": It has been messy, noxious and hard to put out. Each time a solution has appeared close at hand, new revelations emerge from Greece, fanning the flames.
On Thursday, new data showed that the current Greek administration, like its predecessor, had underreported its debt in order to hide problems from outsiders. The European Union's statistical office said the government's 2009 budget deficit was $44.3 billion, 13.6 percent of Greece's gross domestic product, which is significantly higher than the 12.7 percent previously reported. In the United States, the figure is about 10 percent.
The news led Moody's, the ratings agency, to downgrade Greek debt for the second time in five months, saying it fears the financially troubled nation might be forced to continue paying high interest rates that could compound the economic woes. To sell its two-year bonds, Greece is paying a back-breaking 11.5 percent interest rate, up from 8 percent on Wednesday. The cost of insuring Greek debt is approaching record highs.
The revision zapped further confidence in the reliability of Athens's figures. It also suggested that the government would need far more belt-tightening to meet budget targets this year and avoid a default.
"The revised figures are not good news," said Diego Iscaro, an analyst with IHS Global Insight in London. "A higher deficit means that fiscal consolidation will be even more difficult to achieve than previously thought. Moreover, the constant revisions made to the Greek fiscal figures exacerbate the already weak credibility of the government."
The new developments raised the specter of a sovereign debt default in Greece, something that hasn't happened since Russia defaulted on its public and private debt in 1998. A default would lead to a restructuring of Greek debt; that means creditors would be forced to accept a negotiated figure that pays them cents on the dollar, a practice known in the industry as "taking a haircut." Some analysts say this is inevitable.
"Greece's only way out is a debt restructuring, which will include a haircut to bondholders, and that is an implicit default," said Peter Boockvar, an equity strategist at Miller Tabak.
If Greece must restructure, much of Europe will feel the pain, Boockvar said.
"We've seen the cost of capital going up for Italy, Ireland, Portugal and Spain, and banks that hold the debt of these countries will get impacted," he said.
Hampered by high levels of unemployment and government spending, the 16-nation bloc that shares the euro was hopeful of achieving a very modest 1 percent growth in GDP this year, compared with 3.1 percent for the United States, according to the IMF. If Greece defaults, Europe will be hard-pressed to show any economic growth this year. Boockvar said the austerity conditions imposed in a bailout will slow growth for up to 35 percent of the euro zone.
On Thursday, Greece's problems led investors to focus on other deeply indebted nations in Europe. The spread on Belgian bonds jumped after the government of Prime Minister Yves Leterme collapsed. Belgium's budget deficit, at 4.8 of GDP, is far lower than Greece's, but the nation is heavily leveraged, with overall debt amounting to 100 percent of GDP. Analysts remained concerned that the political crisis could further damage the fragile economy.