Greece May be Forced to Seek Emergency Aid
Today’s decline in Greek asset prices may mean that the Athens government may be forced to seek emergency aid from the EU. Greek bond prices and bank stocks have fallen to a level indicating that market confidence has run out for the debt hammered nation. Greek 10 year bond spreads widened more than 40 basis points vs. German bonds to 461 basis points and during the last three days Greek bank stocks have fallen 14%. Panagiotis Dimitropoulos, treasurer at Millennium Bank in Greece stated, “Spread levels today are insane, they are not levels for a euro zone country. It seems Greece is being pushed toward the aid mechanism.”Greek officials have said that high interest rates demanded by investors make it difficult to finance the nation’s deficit. Greece may have no other choice than to access the safety net hammered out at last month’s EU summit. Under the agreement the EU would provide bilateral loans supplemented by IMF loans if necessary. Political divisions between EU governments on how to handle Greece’s debt problems linger and the details of the loan mechanism have yet to be sorted out causing confusion among investors.
Credibility of Euro Zone at Stake
Should Greece apply for aid the loans could possibly be delayed for a long period and the amount available could fall short of what the Athens government actually needs. Under last month’s EU agreement a unanimous vote would be required to trigger any aid package. Opposition to any kind of aid for Greece remains high in Germany and Germany could possible delay and aid package for Greece3. News reports indicate that EU nations are split on what interest rates Greece would be charges under last month’s agreement. Germany and the Netherlands have called for higher rates to deter EU countries from undisciplined spending. Some analysts believe Greece will need loans totaling 20 to 50 billion Euros to resolve the nation’s debt crisis. Under this scenario markets would be concerned about Greece’s ability to meet the tough conditions of the EU loans. Should Greece turn to the IMF the credibility of the Euro Zone could be at stake. Turning to the IMF would indicate to markets that the EU is not capable of solving a crisis in a member state.
Possible Greek Downgrade
Rating agency Standard & Poor’s said Greece could suffer a downgrade if high borrowing costs continue although the agency’s senior analyst for Greece Marko Mrsnik said the risk of a default is low. European Central Bank President Jean-Claude Trichet also said that there is no danger of default. Germany, which can block Greece’s access to the loan package said that the rescue package is a last ditch option and aid to Greece is politically unpopular in Germany.
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