Sunday, April 25, 2010

Greek Financial Crisis Passing Point Of No Return

After months of increasingly desperate attempts to fix Greece, things have deteriorated to such an extent that they may be no longer fixable. 

On Friday, Greece formally requested to access a $60 billion emergency aid package, initiating a bailout process that will  test the financial strength of Euro-Zone.

Prime Minister George Papandreou called his country's economy a "sinking ship," as borrowing costs reached 12-year highs and recent fiscal measures didn't create the market support needed to save his country.

The yield on Greece's benchmark two-year note topped 11%, ten-year bond yields reached 8.83%, while rating agency Moody's downgraded the country's credit rating one notch to A3 - the second downgrade this year.  European Union statistics service Eurostat on Thursday revised Greece's deficit to 13.6% of Gross Domestic Product (GDP) in 2009, up from 12.7%, questioning the country's ability to reduce the budget deficit to 8.7% this year as planned.  The revision is up from 13% of GDP just a month ago.

Greece is facing $11.4 billion of bonds maturing on May 19 and hopes a request made now will accelerate the bailout process in time to meet that deadline.

Even if this initial bailout package is adopted, it is questionable as to whether it will even cover Greece's debt obligations for 2010.

The Economist projects Greece will run up an additional $89 billion in debt by 2014, doubting Greece's ability to make effective budget cuts while trying to emerge from a recession.  As debt piles up, investors will be less likely to buy Greek bonds and draconian austerity fixes will hinder economic growth.

Sovereign debt concerns have already spread to other Euro-Zone nations and are escalating with Greece's situation.  Fellow "PIGS" (Portugal, Ireland Greece and Spain), already faced increasing bond yields this week, strengthening the argument that Greece is the start of a debt contagion spreading through Europe to the United States.

The aid package will give Greece $40 billion in 3-year loans from its fellow Euro-Zone nations at a 5% interest rate and an additional $20 billion from the International Monetary Fund (IMF) will be available at an even lower rate.  The offer was announced a couple of weeks ago in hopes the pledge of support would be enough to encourage investor confidence.

As yields on sovereign debt of the "PIGS" nations grow, the likelihood of raising capital from institutional investors diminishes.  Greece had hoped to raise $10 billion from U.S. investors, but now that appears to be dead.  As the contagion continues to spread, it's a matter of time before the thin fabric of the global financial community takes many more countries down with it.

Marko's Take

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