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

[JasonC]

Horsefeathers, every word.

The economic needs is immediate and the Greek government has only three options. Default and screw their creditors, and in so doing deprive themselves of all access to international capital. Or take the EU's money and actually use it, while cutting the public sector to be able to pay it back. Or three, nukes the public sector by putting debt repayment first and boondoggle giveaways dead last.

They will almost certainly pick the second. But there isn't any revolution or any private confiscation involved in a particle of it. You simply don't find the financial realities dramatic enough for your political stage directions. Tough. It makes you silly, it doesn't change the market or Greece.

[bruinbirdman]

"Default and screw their creditors"

Sillyness aside. Recently, Iceland told the creditors to screw it. Ireland chose to bite the bullet. Latvia cut public spending 20% and is biting the bullet. Argentina told the creditors to screw it, confiscated private pensions and took control of the central bank.

Greece has quite the history of telling creditors where to go.

My real question is, I guess, does the EU have the balls to enforce economic necessities on Greece?

yitbos

[JasonC]

Iceland had its own currency and it fell by half as soon as it defaulted.

Greece needs not just to service existing debt but to borrow 10% of GDP this year. If they can manage their finances without that borrowing, they don't need to default. And defaulting doesn't help them borrow 10% of GDP this year.

Printing might if they defaulted and also left the Euro. That is just a roundabout way of cutting wages by a third or half, as Iceland did. They can cut public benefits and public employee wages by less and avoid the need.

It's all stupid. And clear. They may well engage in such stupid courses of action - financial acumen is not their government's leading characteristic. But none of it helps them.

Countries that decide to screw their creditors may, 10 to 15 years later, borrow again - if they aren't in a crisis, and have their budget more or less in order, and their economy is growing. If Greece had any of those things they wouldn't be considering default to start with.

It's a fools game...

[bruinbirdman]

"It's a fools game... "

Yeah, my guess is they will agree to all EU stipulations, get the EUrotopios, then do as they please.

yitbos

[bruinbirdman]

""It's a fools game... ""

The EU is doomed.

yitbos