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Guest Post: Greek 2 Year Yields 20 Percent, Italy Up 6 Basis Points, Portugal Up 7 Basis Points, Spain Up 27 Basis Points

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It’s not just Greece and Portugal.

As Simon Johnson reports:

This is not now about Greece (with 2 year yields reported around 20 percent today) or Portugal (up 7 basis points) or even Spain (2 year yields up 27 basis points; wake up please) or even Italy (up 6 basis points). This is no longer about an IMF package for Greece or even ring fencing other weaker eurozone economies.

This is about the fundamental structure of the eurozone, about the ability and willingness of the international community to restructure government debt in an orderly manner, about the need for currency depreciation within (or across) the eurozone. It is presumably also about shared fiscal authority within the eurozone – i.e., who will support whom and on what basis?

(In related news, Eurozone sovereign credit default swaps widened somewhat Tuesday, but tightened again after the German finance minister said that Germany will rush through a disbursement of funds to Greece.)

Standard & Poor’s downgraded Spain’s sovereign credit rating today from AA+ to AA, after recently slashing Greece’s rating to junk and lowering Portugal’s rating two notches from A+ to A-.

Ambrose Evans-Pritchard writes that there are “ominous signs of investor flight from Spain and Italy.”

As this Reuters chart shows – based on information from BIS – France, Switzerland and Germany are the largest holders of Greek debt:

http://graphics.thomsonreuters.com/10/04/GLB_GRDEBT0410.gif


David Rosenberg notes:

Portugal’s stock market has traded down to a 12-month low and it’s so bad in Greece that the government has banned short selling for two months. (Hey, it worked in the once-capitalistic U.S.A. didn’t it?) We see in the NYT that Barclay’s analysts believe that Greece needs €90 billion to see them through, €40 billion for Portugal and €350 billion for Spain!That is €480 billion of refinancing help, which dwarfs the latest €45 billion EU-IMF joint aid announcement by a factor of TEN (according to Ken Rogoff, the IMF is maxed out after €200 billion)! Do euros grow on trees as fast as Bernanke-bucks? Would the ECB, modeled after the Bundesbank, ever resort to the printing press for a fiscal bailout? Where exactly is this money going to come from?

***

Yesterday was really as much, if not more, about Portugal than it was about Greece. Contagion risks are spreading as they were amidst the turmoil around Bear Stearns in early 2008 …

[Spain’s] combined fiscal and current deficits are the highest in the industrialized world, save for Iceland (and we know what shape it is in). The amount of debt it has to refinance in the coming year is as large as the entire Greek economy …

***

If the other two major rating agencies follow S&P’s lead and cuts Greece to “junk”, then the ECB would be in a real bind for it cannot hold below-investment-grade bonds on its balance sheet. If the ECB does accept junk-rated Greek debt as collateral, then the sanctity of its balance sheet will be seriously undermined; though this ostensibly didn’t matter too much to the Fed in the name of saving the system.

Nouriel Roubini says “in a few days there might not be a eurozone for us to discuss.”

It is tempting to assume that this is just a European problem. But that might be a very erroneous assumption. See this, this and this.

And as Megan McCardle writes:

The most terrifying words I’ve seen written so far about the growing crisis in Greece were penned by Yves Smith yesterday: “So the whole idea that the financial crisis was over is being called into doubt. Recall that the Great Depression nadir was the sovereign debt default phase. And the EU’s erratic responses (obvious hesitancy followed by finesses rather than decisive responses) is going to prove even more detrimental as the Club Med crisis grinds on.”

The Great Depression was composed of two separate panics. As you can see from contemporary accounts–and I highly recommend that anyone who is interested in the Great Depression read the archives of that blog along with Benjamin Roth’s diary of the Great Depression–in 1930 people thought they’d seen the worst of things.

Unfortunately, the economic conditions created by the first panic were now eating away at the foundations of financial institutions and governments, notably the failure of Creditanstalt in Austria. The Austrian government, mired in its own problems, couldn’t forestall bankruptcy; though the bank was ultimately bought by a Norwegian bank, the contagion had already spread. To Germany…. It’s also, ultimately, one of the reasons that we had our second banking crisis, which pushed America to the bottom of the Great Depression, and brought FDR to power here.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander… http://www.washingtonsblog.com

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9 comments

  1. PJM

    At 3/12/2009, an hedgefund shorted almost 12 millions of BCP.ls shares.

    At 7/12/2009, S&P downgraded debt Portugal.

    At 23/4/2010, the same hedgefund shorted almost 13 millions of shares of BCP.ls.

    At 27/4/2008, the same S&P agency downgraded Portugals debt.

    The same pattern. The Abaco Financials Master Fund had the good “luck” to short portuguese shares four days before S&P downgraded the portuguese debt. Notice the name of the fund managers: PCE Investors Limited. You will hear news about that behaviour by this hedgefund.

    USA, the cowntry where money buys everything. ;)

    1. PJM

      If USA doesnt stop this corruption inside their financial institutions and credit agencies, maybe will loose european allies forever.

      Another aboout american corrupt financial system:

      “Currency Wars: Markets Shudder on Downgrade of Spain

      There was unusually heavy put buying yesterday in NY markets on the Spanish stock index ETF.

      Lzst month a group of US hedge funds were investigated for collusion in planning short selling assaults on the euro. Having exhausted the developing world, which has largely tossed them out, have the economic hitmen finally turned on the developing world as we forecast in 2005 that they would?”

      In http://jessescrossroadscafe.blogspot.com/

      I believe americans authorities are working together with some financial institutions to destroy the €uro. This is my personal opinion. I am not sure if this opinion inst spread in anothers countries and trading desks. I believe europeans governments, at least two, are gathering information about this american war agaisnt Europe.

      Are USA sure that will have more allies in Europe, except his british poodle?

      American people, weak up. Its time to show to yours leaders that americans arent like their oligarchs. If dont stop this war, dont expect european friendeship from people and governements.

      1. abelenkpe

        Sweet! We need to weak up? Our country is covertly working to destroy the Euro? The internet rocks! Where else could one find so many gullible paranoid conspiracy nuts?

        1. PJM

          I agree with you. How can be possible to be paranoid? But, istn true that inside USA everybody is discussing the corruption in the financial system? Isnt true that GS is in the bench? Or some suspections about the ratings on subprime? Isnt true that exists a PPT? Isnt true that a lot of banking executives worked before in the information agencies, that populace call them, spionage agencies? Isnt true that a lot of seniores executives in these agencies worked in the banking sector before?

          But, hey! I gave you facts. If you understand portuguese, I can give you links to know how this hedge fund shorted the portuguese bank before the downgrading and bougth after that.

          Ah ok! I must to be paranoid to see the pattern and I should believe that these institutions are above any suspect.

          My friend, I work with markets to much years to learn how not believe in some coincidences. Thats why I still do markets, do you see? ;)

      2. Keenan

        The late Paul Erdman imagined something a bit like this – except that in his 1981 novel “The Last Days of America”, the bullseye is on the U.S.

  3. kulicuu

    PJM is correct. Making fun of his/her English skills just shows you haven’t got a point. How good is your Portuguese? The reference to the “paranoid conspiracy nuts” meme is equally hackneyed, also showing you have no point of engagement with the facts as presented.
    Actually PJM’s “personal opinion” about the economic warfare is a widespread view, all over the web. Nakedcapitalism plays in a much more subdued key, heavy on the euphimisms… which is fine, and necessary. Still, it’s good to have comments trading in the brutal facts of the day in their intrinsic simplicity. At least it’s a nice contrast with the long-winded obfuscations/apologia we often get in the guest posting.

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