Business / International
Greece slips closer to the edge
15 Apr 2011 at 12:49hrs | Views
Recent comments from German officials apparently accepting that Greece may eventually need to restructure its debts have rattled the markets and appear to dash any hopes that the Portuguese bail-out would mark the end of the rolling financial crisis in the euro-zone. At the time of writing, Greek 10-year government bond yields have risen by over 50 basis points on the day, to a new crisis high of more than 13.5%, while three-year yields are now an astonishing 19.5%.
Today's "road map" has done nothing to settle the markets' nerves. The Greek Government has fleshed out its privatisation plans and announced it will implement fiscal measures worth €26bn in an attempt to reduce the budget deficit to 1% of GDP by 2015. However, the economy is looking ever more fragile and we expect public debt to balloon to around 170% of GDP by 2013. Accordingly, we see only two ways to restore the state's finances to a more sustainable path. One would be for other euro-zone governments to provide Greece with some kind of fiscal transfer – effectively, giving Greece the money. But the core countries are as reluctant as ever to contemplate this. The second would be for Greece to restructure its debts. We therefore continue to think that it is only a matter of when, rather than if, Greece is forced to default.
It is just about plausible that the markets might take a restructuring of debt in a small economy like Greece in their stride, provided it were orderly. After all, such an event is now pretty much priced into the Greek bond market itself, and Greece at least could then start again from scratch. However, such events are rarely orderly. Moreover, Spain could soon be dragged into the crisis. (See the European Economics Focus, "Can Spain stay out of the crisis?" 12th April.) For now, the markets are unwilling to give anyone the benefit of the doubt: other peripheral government bond yields, including those of Spain, have risen pretty sharply too, and the euro is under pressure again. We expect more of the same in the coming weeks.
Today's "road map" has done nothing to settle the markets' nerves. The Greek Government has fleshed out its privatisation plans and announced it will implement fiscal measures worth €26bn in an attempt to reduce the budget deficit to 1% of GDP by 2015. However, the economy is looking ever more fragile and we expect public debt to balloon to around 170% of GDP by 2013. Accordingly, we see only two ways to restore the state's finances to a more sustainable path. One would be for other euro-zone governments to provide Greece with some kind of fiscal transfer – effectively, giving Greece the money. But the core countries are as reluctant as ever to contemplate this. The second would be for Greece to restructure its debts. We therefore continue to think that it is only a matter of when, rather than if, Greece is forced to default.
Source - Capital Economics
