Just like Rome, Faggots Bankrupt Greece. As Greek Bond Rates Soar, the Specter of Bankruptcy Looms
Left-wingers Are Wimps
LONDON — As interest rates on Greek debt spiral upward again, the question
facing Europe is no longer whether Athens has the political will to cut
spending and raise taxes to curb its gaping budget deficit, but whether
Greece will run out of money before it gets the chance to do so.
With the rate on 10-year Greek bonds reaching as high as 7.5 percent on
Thursday, up from 6.5 just three days ago, the cost of insuring against a
Greek default hit a record high.
The message from the market could not be clearer: artfully worded
communiqués from Brussels will no longer suffice. To avoid bankruptcy,
analysts said, Greece needs a bailout from Europe, and fast.
“This is no longer about liquidity; it’s a solvency issue,” said Stephen
Jen, a former economist at the International Monetary Fund who is now a
strategist at BlueGold Capital Management in London.
But with European officials consumed with a debate over whether loans to
Greece should be offered at rates consistent with a typical I.M.F. bailout
or punitive ones closer to current market levels, the risk is that while
Brussels fiddles, Greece is burning.
At a press conference on Thursday, Jean-Claude Trichet, the president of
the European Central Bank, sought to break the fever in the markets by
saying that the aid program proposed by the International Monetary Fund
and the European Union was a “very, very serious commitment.”
The statement helped bring yields on 10-year Greek government bonds down
from their peak for the day, to 7.35 percent, but it was not enough to
turn around the mood of pessimism that contributed to a further fall in
Greek and other European stocks.
“Time is running out,” said a senior official in the Greek government who
spoke on condition of anonymity because of the delicacy of the issue. “The
market is testing Europe’s resolve.”
To a large extent, this latest bout of Euro-stasis is a function of
Germany’s view that it is not the market contagion from the Greek drama
that presents the greatest risk to Europe.
Instead, Berlin is far more worried, as Mr. Jen puts it, about the
supposed “contagion of bad behavior” in other countries like Portugal and
Spain that might follow if Greece were to become the beneficiary of a
bailout on relatively generous terms.
“This should be easy to do; Greece is only 3 percent of Europe’s G.D.P.,”
said Paul De Grauwe, an economist based in Brussels who advises the
president of the European Commission, José Manuel Barroso. “But this is no
longer a financial issue. It is about politics and nationalism, and it is
a real setback for those who believed in a united Europe.”
There are unmistakable signs that individuals and corporations are
withdrawing funds from Greek banks, although the sums involved do not yet
constitute a bank run.
Still, weakened Greek banks, increasingly shut out of the capital markets,
have become largely dependent on the European Central Bank and have turned
to the Greek government to release more money from a previously
established rescue fund.
The Greek government is coming close to giving up on private investors as
well. While Athens said it would go ahead with its short-term borrowing
auctions this week, the planned fund-raising trip this month by Greece’s
finance minister, George Papaconstantinou, to tap Wall Street investors is
unlikely to happen as long as Greek borrowing costs remain high, said a
person who was briefed on his plans.
Greece’s hope is that it will be able to borrow as much as 30 billion
euros ($40 billion) from Europe and the I.M.F. at a rate of about 4
percent or so, which is consistent with the terms offered by the fund to
other indebted countries.
Such a view, however, assumes that the I.M.F. would be the lead actor in
the rescue, as it was in countries like Hungary and Latvia that are not in
the euro zone. In all the vagueness of the European Union’s agreement with
the I.M.F. on Greece, the one point of clarity was that Brussels rather
than the I.M.F. should dictate terms, even if a team of I.M.F. experts was
already in Athens advising the government.
As a result, European officials, pressed hard on this point by Germany,
are now saying that Greece must not receive the carrot of concessional
interest rates available to those who agree to accept the stick of an
I.M.F.-style austerity package.
Greece’s interest payments on its net debt, as a percentage of its gross
domestic product, are already the highest among developed nations,
according to recent research by Deutsche Bank. And as the economy withers
further in the face of spending cuts and tax increases, its ability to
generate the revenue to pay these sums decreases.
“If you look at Greece’s G.D.P. potential and its borrowing costs,” Mr.
Jen said, “there is a gigantic gap.”
The sharp rise in rates has spurred increased talk of some form a debt
restructuring. In such a situation, analysts said, holders of Greek debt
could perhaps be forced to accept a loss of 20 percent or more on their
bonds. That would be similar to what happened after Argentina defaulted on
$93 billion in debt in 2001. Like Argentina, Greece has suffered from a
fixed currency, fiscal deficits and a growing lack of industrial
competitiveness.
Still it seems unlikely that Europe — which through German and French
banks owns over 100 billion euros in Greek bonds — could countenance such
a solution.
“If you do a restructuring, people would not lend any further money to
Greece,” said Yannis Stournaras, an economist and an adviser to previous
Socialist governments. “That would be a huge mistake,” he added. “Greece
has the mechanism. It just has to ask for the money.”