The euro drops to the lowest against dollar in a year, as Eurostat revised the Greek deficit for 2009 upwards to 13.6% from previous 12.6% and Moody’s downgrades Greek bonds to A3. Greek government bonds jumps 81bp to 8.97%, 2-year bonds to over 10%. The Portuguese spread widened to 172bps, and Spanish to 88bps. The investors are clearly betting on a Greek default, as G-20 meets in Washington to discuss the intensifying crisis.
“Judging from history, it is very difficult to turn these technical dynamics around in the absence of a very large distressed debt buyer base and/or massive official financing.”
The financial markets obviously lacks the decency to wait for the German state elections on May 9 before testing the credibility of the EU. Furthermore, the decision by the German parliament to put the Greek aid package into a separate piece of legislation will invariably mean a delay in the German contribution of the aid package, which is the largest. The trigger of the European aid package is imminent.
Greece suffered yesterday a new punishment of the markets on news the third upward revision of its public deficit figures in just six months.
Eurostat, the Statistical Office of the European Commission, raised the Greek deficit figure of 2009 to 13.6% of gross domestic product (GDP), compared to 12.9% set a few weeks ago and warned there might still be other upward revision.
The effects of communication of such data led to a decline of Greek debt securities and more expensive funding. The return on the benchmark 10-year stood at 8.78%, which means that the Greeks must pay 5.73 percentage points more interest than the Germans to place the debt markets.
See this article in El Pais for a good overview of the yesterday’s hectic events on financial markets, which has a nice few lines about some contradictory statements of the IMF, which reflect the difficulty of being simultaneously helpful and honest.
Greek crisis will worsen
At FT Alphaville Pimco-boss Mohamed El-Erian, chief executive of the world’s biggest mutual fund, writes that the Greek financing difficulties are about to worsen as long term holders dump Greek securities due to “persistently high and volatile government spreads” that push some investors to sell.
These investors had assumed that Greek bonds only represent an interest rate risk not a credit risk, and will now adjust their excessively large risk adjusted holdings, further fueling the contagion risk.
El-Erian writes that history tells us that to turn this around without massive official financing.
“European equity markets are under pressure, risk spreads on other European peripheral countries are widening (particularly Italy, Portugal and Spain) and the Euro is selling off.”
“As discussed in an FT piece in April (“Why the Greek Rescue Isn’t Going to Plan”), there is no immediate solution to the mounting difficulties facing Greece. The country has limited policy flexibility, creditors are hesitant to provide additional financing, and coordination problems are immense.”
“All this should be well recognized by now. It is not,” Mr. El-Erian writes.
Euro Zone Likely To Break Up
FT Alphaville also has an interesting post by the European economist of RBS, who says it would defeat the purpose for the EU to make its loan super senior.
That would push the existing bond holders down, and market yields up.
This would only matter in a default, he argues, and in that case the euro zone is likely to break up in any case.
“While it is pretty clear that IMF loans will be senior to Greek bonds as is usually the case in such situation, there is less information on the euro area loans. The loans made by the European Community to Easter European countries through their balance of payments support mechanisms were senior to the sovereign bonds and thus were equal to IMF loans. However, we believe that the bilateral loans are a complete different configuration,” RBS economist Jacques Cailloux writes.
“Pushing the argument even further, we are not sure that the debate surrounding seniority is actually relevant as it would only matter in a context of default, a scenario which would equate in our view to the end of the euro, a scenario we do not envisage.”
Finland Backs Proposal For New EU Treaty
Finland is ready to back the German proposal for a fresh EU treaty to enforce fiscal discipline in the eurozone if necessary, the Financial Times reports.
Prime minister Vanhanen says that the eurozone must restore its credibility as a rules-based union by tackling soaring deficits that have left almost every member in breach of the stability pact.
Priority should be to tighten rules within the existing treaty, including the withdrawal of EU funds from countries that ignore warnings from Brussels over excessive deficits, Finland’s PM says.
European Markets Snap Shots
Here’s a few European markets snap shots at noon local time.
The gold price is moving sideways, as the sale pressure increases (shown by the On-balance Indicator).
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