IMF and Bundesbank fear contagion from Greece as bond spreads soar to fresh records

The Telegraph ^ | 4/21/2010 | Ambrose Evans-Pritchard

[bruinbirdman]

The International Monetary Fund has warned that Greece’s debt crisis risks spinning out of control, threatening to spill over across the region unless action is taken soon to restore confidence.

Greek dockworkers went on strike on Wednesday, a precursor to broader stoppages by public sector
workers in hospitals, schools, and ministries

"In the near term, the main risk is that – if left unchecked – market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion," said the Fund in its World Economic Outlook.

Bundesbank chief Axel Weber echoed the concerns, saying the financial system was still very fragile and subject to a "significant risk of contagion effects. A possible default by Greece would most likely be a severe economic blow for other countries in monetary union".

Spreads on 10-year Greek bonds jumped on Wednesday to a post-EMU high of 529 basis points above German Bunds, pushing borrowing costs to over 8.3pc. The Greek daily Kathimerini said the government was out of its depth and appeared to be in a state of "nervous exhaustion".

The new twist on Wednesday was a sharp rise in default insurance on Club Med and Irish debt. Five-year credit default swaps (CDS) for Portugal rose 36 basis points to 235. Spain’s CDS rose to 17 to 162. Both countries are now nearing the all-time highs at the peak of last year’s credit crisis.

Greece’s bond market is effectively frozen, so spreads are almost meaningless. "It is a very thin market. Investors are keeping their powder dry," said Chris Pryce from Fitch Ratings.

Marco Annunziata, Europe economist at Unicredit, said Greece must bite the bullet and activate the joint EU-IMF rescue plan, warning that time is running out with

[bruinbirdman]

"Greek dockworkers went on strike on Wednesday, a precursor to broader stoppages by public sector workers in hospitals, schools, and ministries."

Communist unions would just a soon see the state disintegrate.

[tet68]

When that first domino falls it’s only a matter of time.

[Farmer Dean]

I would rather buy Detroit muni bonds than Greek bonds at this point.The EU is really in trouble,could fall apart in the near future.

[PAR35]

I’m not sure. Who’s more likely to get a bailout - Detroit, or Greece. I’m thinking that when the chips are down, the Germans are going to be forced to pony up. On the other hand, it’s not a big deal if a municipality files a Chapter 9.

[longtermmemmory]

unions always go on strike after easter and just before May Day. (may first the international day of communism)

Remember they have august off too.

they are just milking the time off.

[longtermmemmory]

what would happen if EU nations applied for US statehood?

[JasonC]

They have a deal in place to issue up to $40 billion at concessionary rates through the EU. They just haven't actually done it. They were apparently hoping that just having the deal would drop rates, without actually using it. No sir. So use it already. Unless it was just a bluff all along...

[JasonC]

Obama would say "yes" and get relected?

Let's not go there...

[Bean Counter]

“...unless action is taken soon to restore confidence.”

So they will soon be shooting the Communists?? That would certainly be one way to effectively solve a great number of problems...

[yefragetuwrabrumuy]

Oddly enough, I’ve noticed that the better US munis have been moving up strongly of late, driving yields down. And yet the long term tax free yields are still often over 5%.

Money that Obama will not get his mitts on. I think Carter tried to tax munis, and the collective shriek of every city and county in the country put an end to that idea quickly.

[qwertyz]

And don’t forget the nation will come to a stop in June for the World Cup. Greece is in a weak Group 6 and should advance easily ... weeks and weeks of fun!

[FlyingFish]

If having the deal in place without using it didn’t work, will actually using it really help? Or, have the markets dismissed it as a weak hand?

[bruinbirdman]

"Oddly enough, I’ve noticed that the better US munis have been moving up strongly of late"

Perhaps not so odd since taxes on all other bond and dividend yields are going up in 2011.

yitbos

[bruinbirdman]

"They have a deal in place to issue up to $40 billion at concessionary rates through the EU. They just haven't actually done it. They were apparently hoping that just having the deal would drop rates, without actually using it. No sir. So use it already. Unless it was just a bluff all along... "

"Do these people know what is going on and refuse to act?" "Do these people know what is going on and are just prolonging the inevitable?"

And then there is the more often appearing reference to "Melonesque liquidation".

The inclination here is to the Melonesque liquidation?

yitbos

[JasonC]

Yes actually using it will help. Emphatically. If Greece can borrow at 5% or so, then the bond players holding out for 7.5 or 8 are whistling dixie - nobody needs their money.

The markets haven't moved because it went about five rounds of only sorta and Germany saying no before half saying yes, and they will believe it when they see it.

[JasonC]

That's silly. Greece can readily service its debts if it makes it a priority to do so. If they decide that make believe and giveaways are more important than their financial future then they can fry themselves, sure. But there is no reason for them to do so, and nothing stopping them from putting debt payment way above silly giveaways to public employee unions and welfare deadbeats and all the rest of it. It is not like the state in Greece doesn't have the revenue. It just throws it away on useless crap.

[bruinbirdman]

"It is not like the state in Greece doesn't have the revenue. It just throws it away on useless crap. "

Melonesque liquidation = the public sector liquidates the private sector?

Any government with enough power can spend as it pleases while it liquidates the private sector?

yitbos

[RobRoy]

I have never considered this Greek thing over and saw us as in the eye of a storm. Frankly, it is how I see the whole world economy.

And the fallout (no pun intended) from this volcano is by no means over. Estimating damages now is almost like estimating damages just as the Haiti quake was in its beginning shakes.

And there are other Black Swans to come. I’m still waiting for a BIG muslim one.

[JasonC]

The reverse, actually. The government in Greece cannot afford to continue robbing the private sector to support deadbeats. They long since passed the point where they were extracting enough from the private sector within Greece, to pay for their boondoggle giveaways.

They are now giving away money borrowed from abroad instead, because they can't extract it - the economy tanking reduced their "take" and raised their giveaways too violently for that. Now they need to pay 9-11% to borrow foreign capital if they want to give away more than then extract. Which they know they cannot afford and would never grow out of. In other words, if they continue to borrow to support public spending they will simply commit themselves to reversing the operation in favor of their foreign creditors, on a time scale of a couple of years.

They might as well cut to the chase and begin the reversal now. They could postpone the operation by a year or two by taking EU and IMF money and then defaulting anyway, but that would destroy their credit for a decade plus, push them out of Europe and the Euro, etc. And they still would not be able to pay the current level of public boondoggle giveaways in that case, because they'd be cut off from additional foreign capital to scam or rob.

They can readily afford to service their *debts* and to restore their credit. What they cannot afford is to sacrifice their credit or their private economy to public sector giveaways. By any means, in any manner. That game is simply over.

[bruinbirdman]

"What they cannot afford is to sacrifice their credit or their private economy to public sector giveaways. By any means, in any manner. That game is simply over. "

Of course, this is, in the long run, economic reality. Anti-capitalists would prefer it. We are not talking long term economic sanity, rather short term populism and rable-rousing. Politics is often short term opportunism..

Nonetheless, with a public sector so powerful, the private sector still has much to be confiscated/liquidated and distributed in Greece.

There are those who say that, when 40% of a population (the size of Greece, France, UK public sector) is threatened, the seeds of revolution are sown.

The Russian, Mao, Chavez, etc., revolutions can be characterized as Mellonesque?

Discussions are not absent relevent to the willingness of EU to step in and enforce economic unity.

Relevent the USA, there are increasing forces/numbers who are perfectly willing to vote the liquidation and distribution of private sector assets.

yitbos