A Big Game Of Chicken

Greece, EU And Markets In Big Game Of Chicken

Telgraph.co.UK, 29 January 2010

Never mind the denials and semantics: the European Union will help Greece cope with its financial problems because it has no choice. That is the political reality. Whether aid comes in the form of bilateral loans from euro zone member countries, or via 'special facilities' that are possible under the existing treaties, it has become clear that Athens will not be left out in the cold.

Yet jittery markets do not seem to be convinced, and have sent Greek sovereign spreads to record highs in the last two days. Investors seem to be taking at face value the official protestations that Greece must— and indeed will— deal with its problems by itself. A feverish poker game is likely to intensify in the coming days— and perhaps until mid-February, when EU leaders will scrutinise the Greek government's plan to drastically cut down its deficits.

Around the smoky table sit Greece and the rest of the European leaders who want to make sure that maximum— but not fatal— pressure is applied to Greece so that both its government and its people understand how radical its turnaround plan must be. Then there are the markets, not sure who is bluffing, and frantically biting their nails the as stakes rise. Investors are testing the limits of euro zone solidarity, and are challenging EU member countries to tackle the problem of their ballooning deficits.

Greece, in this respect, is mostly seen as the first and weakest link that could be followed by, say, Spain or Portugal. But the EU, Greece included, is keen to send the message that the fort will hold— and that it doesn't mind some weakening of the euro, which would help boost exports. Greek sovereign debt is likely to be prone to wild swings in the weeks leading to the EU finance ministers meeting next month. With its fraudulent statistics, corruption and massive tax evasion, Greece surely has serious local problems.

But markets want credible reassurance that European governments will do what it takes to deal with their deficits and long-term debt challenges. In that respect, the intensifying Greek drama is about more than Greece.

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Funds Flee Greece As Germany Warns Of "Fatal" Eurozone Crisis

By Ambrose Evans-Pritchard | 28 January 2010

Germany has triggered a near-panic flight from southern European debt markets by warning that there will be no EU bail-outs, even though it fears the region's economic crisis has turned dangerous and could prove "fatal" for the entire eurozone. The yield on 10-year Greek bonds blasted upwards by over 40 basis points to 7.15% in a day of wild trading. Spreads over German Bunds reached almost four percentage points, by far the highest since Greece joined the euro, and close to levels that risk a self-feeding spiral. Contagion hit Portuguese, Spanish, Irish, and Italian bonds.

George Papandreou, the Greek premier, said in Davos that his country had been singled out as the weak link in a "attack on the eurozone" by speculators and political foes. "We are being targeted, particularly by those with an ulterior motive". Marc Ostwald, from Monument Securities, said the botched bond issue of €8bn (£6.9bn) of Greek debt earlier this week has made matters worse.

Many of the investors were "hot money" funds that bought on rumours that China was emerging as a buyer, offering them a chance for quick profit. When the China story was denied by Beijing and Athens, these funds rushed for the exit. However, a key trigger yesterday was testimony in Germany's parliament by economy minister Rainer Brüderle, who said there would be "no bail-outs" for struggling debtors and no move to a "European economic government".

"A few European nations are exhibiting dangerous weaknesses. That could have fatal consequences for all countries in the eurozone," he said. Despite the warning, he said each country must solve its own problems. "Germany is not in a mood to be the deep pocket for what they consider profligate, southern neighbours," said hedge fund doyen George Soros.

Mr Brüderle's hard line contradicts a report in Le Monde that Franco-German officials are discussing a rescue for Greece in order to keep the International Monetary Fund at bay. The paper cited a source saying that EMU partners were ready to "help" Greece. "It is a question of credibility for the eurozone. The IMF might want to impose monetary conditions."

Le Monde's story was shot down by Berlin and Paris, but there is little doubt that certain officials have been trying to build momentum for a rescue. It is clear that the EU family is split on the issue. Jean-Claude Juncker, head of the Eurogroup of finance ministers, backs "assistance", with support of EU integrationists hoping to nudge the EU towards full fiscal union.

This is fiercely opposed by Berlin, and the German-led bloc at the European Central Bank. There are reports that Berlin is deliberately bringing the crisis to a head, hoping to lance the boil early and force the Club Med states to reform before it is too late. If so, this is a risky strategy. German banks have huge exposure to Greek, Spanish, and Portuguese debt.

Hans Redeker, currency chief at BNP Paribas, said Greece will face "great trouble" if it has to pay 7% rates for long. Athens must raise €53bn this year, mostly in the first half. It has a been relying on cheap short-term debt to fund the budget deficit of 13% of GDP, but this raises "roll-over risk". Tim Congdon, from International Monetary Research, said the danger is that wealthy Greeks may shift money to bank accounts abroad if they lose confidence (akin to Mexico's Tequila Crisis in 1994-1995). This would set off a banking crisis and become self-fulfilling.

Greece has been financing current account deficits— 15% of GDP in 2008— through its banks, which have built up €110bn in foreign liabilities. "If foreign creditors want their money back, defaults and/or a macroeconomic catastrophe appear inevitable," Mr Congdon said. Adding to worries, Moody's has issued an alert on Portugal's "adverse debt dynamics", saying Lisbon needs a "credible plan" to reduce a structural deficit stuck at 7% of GDP rather than "one-off measures".

The deeper concern is Spain, where youth unemployment has reached 44% and the housing bust has a long way to run. Nouriel Roubini— the economist known as 'Dr Doom'— said Spain is too big to contain. "If Greece goes under that's a problem for the eurozone. If Spain goes under it's a disaster," he said.

Jose Luis Zapatero, Spain's premier, replied wearily: "Spanish public debt (52% of GDP) is 20% lower than Europe's average; our treasury spends 5% of revenues on debt costs, less than France and Germany. Nobody is going to leave the euro," he said.