Eurozone debates Greece debt crisis

10 February 2010 9:18 am | By Lee Jones

Reports suggest that Germans are playing down IMF bailout plans and are instead consulting with the European Central Bank to solve the Greek debt crisis. Investor debt fear has led to Greek government debt yields to rocket which has in turn begun to put pressures on other indebted sovereigns such as Spain and Portugal.

But other reports this morning suggest that Germany, the largest eurozone economy, may be preparing to construct a “firewall” instead to contain sovereign debt fears that have begun to spread to the economically weak eurozone nations.

An EU official told The Times: “There have obviously been discussions going on at an EU level about what the options are. There is a feeling that the IMF could offer a better course of action. The IMF has precedents or doing this, it has a system with measures in place.”

But Credit Sights analyst Atish Kakodkar says investors fear that an EU bailout would harm the stronger members of the Euro - he says the increasing pressure on larger EU nations to bail out Greece has pushed their credit default swap spreads significantly wider. As of February 8, he says France CDS had more than doubled to 68bps, while Germany CDS had climbed 80 per cent to 47bps.

Under Euro law a country can be bailed out, but F&C director Ted Scott says an out and out bailout an unlikely scenario as it would encourage other indebted nations to continue spending. An EU summit wil take place tomorrow to address the Greek crisis.

Scott says: “I think it is likely that the EU politicians will want to achieve a ‘solution’ within the framework of the Federation. The EU would wish to avoid this if at all possible because Greece and the other weaker nations is a collective problem for the Federation to work out itself. Seeking external help would also undermine the political and economic fabric of the Union and create a dangerous precedent for the future.”

BNP Paribas head of credit research Vivek Tawadey says any financial support from EU members or the IMF would come with austerity measures being forced upon the countries involved and would likely result in a slowdown in their economies. This has already led to strikes in Greece today as public workers prepare for severe cuts.

Tawadey says: Things are going to get worse before they get better in Greece and in other eurozone countries, and that the market will continue to push peripheral spreads wider.”

While Fidelity International director of asset allocation Trevor Greetham says the Greek situation must be dealt with to avoid further problems, this is not a global sovereign crisis, rather just a bond sell off. He says: “Irish sovereign spreads have not blown out along with Greece and Portugal. US, German and even UK government yields have dropped lately.

“The most likely out-turn for government bonds is that yields rise when private sector credit growth kicks in, as we saw in 1994 for example. There will be a level of yields and currencies at which high quality sovereigns raise the money they need.”

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