Problems In Greece Are Spreading To Other Countries

With the markets steadily heading higher in the United States and the economy seemingly on the mend, it's easy to overlook the fact that there is a major crisis currently unfolding in Europe.

Despite attempts from the International Monetary Fund and over a dozen eurozone countries to try to extinguish the fire that is Greece's debt problem, things are still spiraling out of control.

In a move that poured gasoline on an already burning fire, Standard & Poor's downgraded Greek bonds earlier today to junk status.

And, in more worrying news, S&P also downgraded Portuguese bonds a couple of notches as well.

The main questions that really riled international markets on Tuesday were - how far will the Eurozone debt contagion spread? Will countries such as Spain and Portugal be the next to require bailouts? If so, will there will any money to bail them out?

Bond yields for the downgraded countries are through the roof as the prospect of a major debt restructuring draws closer with each passing day. The interest rates on Greek 2-year bonds are currently at 15.35%, while the 10-years are currently at 9.69%.

Portuguese bonds have spiked as well in recent days, and will likely continue this trend as the contagion intensifies. Credit-default swaps on both Greek government bonds and Portuguese government bonds have been surging in recent days as well, with the Greek swaps trading up 111 basis points to 821 on Tuesday. Portugal rose 54 basis points to 365, and I would expect that they will continue to trend higher.

Greek Prime Minister George Papandreou requested that the EU and IMF activate a 45 billion EUR emergency support package last week, but German Chancellor Angela Merkel said that she wouldn't release the funds until "its (Greece) government had a sustainable plan to reduce its budget shortfall."

Merkel has stated that Germany is still prepared to release funds to Greece, but that she "wants to see its program first." State elections are approaching in Germany, and the prospect of a German-led bailout of Greece is very unpopular in the country. The resistance in Germany to the proposed bailout of Greece has led Merkel to take a hard line, saying that she wants "Greece to agree to several years of budget cuts before releasing any German aid."

The Euro has been savaged since the start of the debt crisis in Greece, trading from over 1.50 (against the USD) to its current level of 1.32. Many people are citing 1.32 as a key resistance level that the Euro can't afford to fall below.

The North American markets felt the bite of the crisis in the European Union as well on Tuesday, as the DJIA, Nasdaq and S&P 500 all fell around 2% on the day.

The situation in Europe was ignited in the fall after PASOK (Panhellenic Socialist Movement) received nearly 44% of the popular vote in Greece's 2009 election. A new government was formed, which quickly announced a new budget draft that would include a deficit of 12.7% of the country's GDP. This was twice the previous estimate, and caught pretty much the entire world off-guard.

One of the rules that member countries of the European Union must adhere to is that deficits can't exceed 3% of GDP. Some countries, including Greece, have circumvented these rules by using financial trickery and "accounting errors" to make their numbers seem better than they actually are.

The big problem that Greece has is that they have a total debt load of around 300 billion EUR, which is approximately 123% of their GDP. Greece must make a 8.5 billion EUR payment on May 19th, which, according to the Wall Street Journal, is "money that it doesn't now have."

So Greece is watching as its borrowing costs are soaring through the roof, which makes the servicing of its debt even more expensive. Some estimates have Greece paying as much as 13% of its government revenues on interest payments alone.

The country has turned to the EU and IMF for a 45 billion EUR support package, but Germany won't sign off until Greece presents them with a "financial austerity" plan that would significantly reduce deficits over the coming years. German citizens, who are just about to vote in a key election in the country, are decidedly against any bailout of Greece and are forcing their leaders to take a hard line.

This is a big mess that is likely only going to get worse over the coming weeks.

Sources: Bloomberg.com - Merkel Tells Greece That Bailout Isn't a Done Deal

Wall Street Journal - EU Seeks Wider Greek Deficit, Roiling Markets


Filed under: The Economic Meltdown