As Greek Bond Rates Soar, Bankruptcy Looms/Fitch Downgrades Greece’s Credit Rating/Shares Rise as Greece Rescue Plan Seems Closer

As Greek Bond Rates Soar, Bankruptcy Looms
By LANDON THOMAS Jr.
Copyright by The New York Times
Published: April 8, 2010
http://www.nytimes.com/2010/04/09/business/global/09drachma.html?hpw


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.

A closed bank in Athens with graffiti that reads “thieves.” The debt crisis has prompted outflows of funds from Greek banks.

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.”



Fitch Downgrades Greece’s Credit Rating
Copyright By THE ASSOCIATED PRESS
Published: April 9, 2010
http://www.nytimes.com/2010/04/10/business/global/10drachma.html?hpw


LONDON (AP) — Greece was hit with another financial headache Friday after Fitch Ratings slashed its credit rating on the country’s debt because of concerns about the government’s ability to get a handle on its debt mountain.

Fitch, one of the world’s big three ratings agency, lowered its rating by two notches BBB- and said that the outlook on the country remains negative.

The downgrade means that Greek debt remains investment grade — but only just. Another downgrade would make Greece’s debt junk status — an ignominious position for a country using the euro.

The downgrade came as the Reuters news agency, quoting an unidentified European Union official, reported that deputy finance ministers for euro-zone countries and senior central bankers have reached an agreement on the terms of possible emergency loans for Greece.

In its downgrade, Fitch said its latest downgrade reflects “the intensification of fiscal challenges” after more adverse prospects for economic growth and increased interest costs — on Thursday the country’s borrowing costs spiked sharply higher as bond investors fretted about the possibility that Greece could default on its debts.

Fitch said the downgrade reflected “ongoing uncertainties about the government’s financing strategy in the context of increased capital market volatility.”

The ratings agency thinks it is now increasingly difficult for the Greek government — despite its commitment to reduce borrowings — to achieve its target of reducing its budget deficit to 8.7 percent of the country’s national income and ensuring that public debt peaks at just over 120 percent of gross domestic product in 2010 and 2011.

“Pressures on the banking system underline the adverse spill-over from sovereign risk concerns on the wider economy, while contingent liabilities from the banking sector will increase as the government provides banks with increased guaranteed funding,” Fitch said.

Fitch took a swipe at Greece’s partners in the euro zone for failing to provide enough clarity about a promised loan facility, in conjunction with the International Monetary Fund.

“The agency reiterates the lack of clarity regarding the mechanism for timely external financial support may have hindered Greece’s access to market finance at affordable cost and hence further undermined confidence in the capacity of the government to meet its fiscal targets,” Fitch said.

It added: “While Fitch judges that external financial support is likely to be forthcoming, greater clarity on back-stop financial support in the form of an explicit I.M.F. program is likely to be required to shore up market confidence in the face of still substantial near-term financing needs.”



Shares Rise as Greece Rescue Plan Seems Closer
By JAVIER C. HERNANDEZ
Copyright by The New York Times
Published: April 9, 2010
http://www.nytimes.com/2010/04/10/business/10markets.html?hpw


A global rally extended to Wall Street on Friday as investors grew more confident that European officials would act on a plan to save Greece from default.

The debt crisis facing Greece, which is struggling to rein in a deficit of nearly 13 percent of gross domestic product, worsened this week as the country’s borrowing costs rose sharply. The yield on 10-year Greek bonds touched a record of 7.5 percent on Thursday, putting pressure on policy makers to firm up a plan to stave off default.

On Friday, European officials tried to calm market jitters by pledging to help Greece even as the rating agency, Fitch, downgraded the country’s credit rating.

“We are ready to take action at any moment to come to the aid of Greece,” President Nicolas Sarkozy of France said at a joint news conference with Prime Minister Silvio Berlusconi of Italy, according to Reuters. The news agency also reported that euro zone officials had agreed on the terms of a possible financial rescue for Greece.

Yields on 10-year Greek bonds eased as stock market investors grew more hopeful that a rescue package would materialize.

“They can’t allow it to continue to deteriorate any further,” said Owen Fitzpatrick, managing director of Deutsche Asset Management. “They’re going to have to step in soon.”

Amid the renewed confidence, the Dow Jones industrial average rose 28.56 points, or 0.26 percent, in early trading. The Standard & Poor’s 500-stock index climbed 2.79 points, or 0.24 percent, and the Nasdaq rose 5.18 points, or 0.2 percent.

As the price of oil climbed to $85.68, energy shares rose. Exxon Mobil gained more than 1 percent to $68.63 a share, and ConocoPhillips rose 1.5 percent to $54.76 a share.

Investors are growing more confident about the strength of the recovery, helped by recent signs of strength in the jobs market and consumer spending. On Friday, they got another bright data point: wholesale inventories in the United States rose 0.6 percent in February, and sales climbed to the highest level since 2008.

As companies prepare to report first-quarter earnings, many analysts are expecting significant growth in revenues. Traders are also looking for businesses to upgrade their outlooks for the year, given signs that the recovery is picking up.

But there are still worries on the horizon.

The situation in Greece reminds investors that the threat of swelling deficits could push other countries closer to default. On Friday, Fitch Ratings said it was cutting Greece’s credit rating by two notches. Analysts worry more nations — Italy and Spain are frequently mentioned — may soon report budget problems of their own.

Worries about relatively stable countries like the United States are also emerging. Traders remain nervous in particular about the huge deficits facing many state governments.

Until a clear rescue plan for Greece is announced, equity traders will probably remain cautious. The next big test for Greece will come on Tuesday, when Athens attempts to auction $1.6 billion in short-term debt. Traders will watch that sale closely to gauge how whether bond traders have changed their outlook on the country’s fiscal health.

European markets rose sharply on Friday. In late afternoon trading, the CAC 40 in Paris gained 1.3 percent, the DAX in Frankfurt increased 1 percent, and the FTSE 100 in London climbed 0.77 percent.

The euro also strengthened slightly, gaining 0.7 percent against the dollar to slightly above $1.34. The pound also rose, climbing 0.5 percent against the dollar to $1.54.

Asian markets ended higher, with the Hang Seng in Hong Kong gaining 1.56 percent and the Nikkei in Tokyo rising 0.3 percent.