Greece’s Lehman moment

International markets were betting this week that Greece would default on its debt as the cost of buying insurance against the country missing a payment on its bonds became the most expensive for any nation in the world.

The rising cost of buying insurance through so-called credit default swaps (CDSs) on Greek debt came amid continued prevarication among eurozone finance ministers about releasing bailout funds to the indebted country and a warning that Italy’s credit rating might be cut.

According to Gavan Nolan, a credit analyst at Markit, to insure €10-million of Greek debt would cost €2-million every year for five years. No other country is as expensive to insure. Venezuela is the next most expensive but even then is almost half the cost.

Markets were awash with talk of Greece facing its Lehman moment, a reference to the bankruptcy of Lehman Brothers in 2008, the largest in United States history, widely seen to be the trigger for the global meltdown in financial markets.

The Greek government faced a confidence vote on Tuesday, which added to anxiety among investors, particularly as European finance ministers have said the bailout needs to be accompanied by austerity measures. With the complex effort to stave off a Greek sovereign default moving towards a climax and anti-government and anti-European Union protesters laying siege to central Athens, Greek Prime Minster George Papandreou won the vote by 155-143 in the 300-seat Parliament.

Brussels and other EU capitals anxiously watched the drama in Athens ahead of a crucial summit of EU leaders. Europe’s hopes of preventing Greece defaulting on its debts were knocked on Tuesday as ratings agency Fitch said that it would declare the country to be in default if commercial banks agree to roll their loans over, as EU finance ministers are planning.

European leaders, led by France and the European Central Bank, argue that Greek lenders could choose to buy new longer-maturing bonds when their existing debts mature, as part of a second Greek rescue package. They say that lenders would be under no compulsion to make the swap, rather than cashing the bond in, so Greece would not be defaulting on its debts. Fitch, though, refuses to accept this.

“Fitch would regard such a debt exchange or voluntary debt rollover as a default event [that] would lead to the assignment of a default rating to Greece,” Andrew Colquhoun, the head of Asia-Pacific sovereign ratings with Fitch, told a conference in Singapore early on Tuesday.

The International Monetary Fund (IMF) expressed its growing concern about the deepening crisis in Greece and said that a failure by the EU to take decisive action could lead to a domino effect through the single-currency zone and result in a second global financial meltdown.

In its starkest warning yet that Greece had the potential to replicate the system-wide shock triggered by the collapse of Lehman Brothers in September 2008, the IMF told Europe’s policymakers to stop squabbling over the terms of a bailout and act immediately to prevent contagion.

“While courageous attempts have been made to address the crisis, policymakers are yet again facing uncomfortable dilemmas, raising uncertainty about the final outcome,” the fund said in its annual health check on the eurozone. “With deeply intertwined fiscal and financial problems, failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers.”

The warning from the IMF was issued by acting managing director John Lipsky, who has been in charge since the resignation of Dominique Strauss-Kahn last month. It came as Europe’s finance ministers said the price of a fresh €12-billion bridging loan to Greece was agreement by the Parliament in Athens to fresh austerity measures.

A team of officials from the IMF has been studying the eurozone economy and concluded that continued financial support for Greece from the other 16 members of the single currency was needed. It said a “more cohesive and co-operative approach is needed to manage the crisis in the periphery” — the group of nations including Greece, Ireland and Portugal that have needed financial help from the IMF and the EU over the past year.

The IMF fears that without decisive action there is a risk of the crisis spreading to other heavily indebted eurozone countries such as Spain and Italy. Despite strong opposition to the austerity measures imposed as a condition of bailout funds, the IMF said it was vital that Greece and the other struggling nations should embrace deep structural reform.

In its report, the IMF said the sovereign debt crisis threatened the “broadly sound” recovery in the euro area, adding that “much remains to be done to secure a dynamic and resilient monetary union”. European stock markets fell sharply on Monday morning following the failure of eurozone leaders to reach agreement on financial aid for Greece over the weekend.

Traders were disappointed that Greece had still not been guaranteed the next €12-billion instalment of its original bailout. The lack of detail over a second Greek rescue package also concerned the City, amid speculation that a disorderly Greek default would send panic through the eurozone, and beyond.

Eurozone finance ministers met over the weekend in Luxembourg, in an effort to reach agreement on the desperately needed €12-billion tranche of funding, and the details of the new rescue deal. The talks broke up in the early hours of Monday, with the final decision postponed until early July.

This means the money will only be granted if the Greek Parliament agrees to a new round of deeply unpopular austerity cutbacks. Tens of thousands of protesters have been gathering in Athens for weeks, registering their anger at Greece’s politicians, and the spending cuts and tax rises that have already been imposed as the price for the original €110-billion bailout.

Papandreou appointed a new finance minister last week, charging Evangelos Venizelos with the responsibility of reaching agreement on the debt crisis. European leaders continue to believe that Greece will accept new economic reforms and austerity measures, despite growing evidence that the population is nearing breaking point.

“I’m certain that Greece will be able to take the decisions needed because the alternative is so much worse for Greece,”‘ said Olli Rehn, the EU commissioner for economic and monetary affairs. —

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Larry Elliott
Guest Author
Jill Treanor
Jill Treanor works from London. Jill Treanor has over 11327 followers on Twitter.

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