Greek bailout leaves markets cold

May 4, 2010

A super-sized 110 billion euro bailout was supposed to calm markets, but investors seemed as frantic as ever. Their logic: Greece still has to go through wrenching cuts, and may end up restructuring its debt, which could force current bondholders to take a haircut. And they fear the euro zone won’t have enough money and willpower to keep the crisis from spreading.

Investors ran for cover in the supposedly safe U.S. Treasuries and dollar, pulling the euro down to a fresh 1-year low. Greek bonds were hammered and the cost of protecting Spain, Portugal and Ireland’s debt went higher. Shares of Banco Santander, seen as a proxy for Spain, fell 7 percent.

The problem is still centered in Athens. The yield on two-year Greek government bond rose to around 14 percent, even though the bailout is supposed to provide the country with all the financing it needs for three years. Investors either don’t believe enough money will come through or are pricing in a debt restructuring before the money runs out.

That sounds plausible. The austerity plan will cut into GDP while debts keep mounting. The new funding isn’t particularly cheap either. The 5 percent interest rate is still well above German levels. The Greek government said it had hired Lazard for financial advice, but denied restructuring was being considered. Maybe, but some sort of debt write-down will be hard to avoid.

Contagion has spread too. It’s less rational yet more worrying, because the fear could become self-fulfilling. If Portuguese and Spanish debt cannot be sold at a reasonable price, the EU will be burdened with a string of rescues it cannot easily afford or manage.

The knee-jerk panic could abate soon. But investors’ insistence on putting these diverse economies into a single boat suggests policy makers have a tougher task ahead of them than they hoped. That big rescue package may be just the start of a long slog to keep the euro zone intact.


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Posted by bbc3456 | Report as abusive

I keep reading about how the investors in this crisis. The question is: Who are the investors? Give us some names, corporations, etc. These generalizations are meaningless.
Investors dealing in this market are not regular folks like you and me. They have big bucks! So why don’t you tell us who they are?

Posted by Drew22 | Report as abusive

I wonder how our pals in Paris are feeling these days? I hope they are digesting their brilliant move they made years ago in forming the EU. A major strategic blunder on the part of Germany and France. They haven’t seen anything yet. Wait until Spain and Portugal’s
economies go down the toilet. They will be joing them. Then in their despair they can seek assistance from their new friend on the block….the Russians! Putin must be licking his chops right now. To think, not one Russian soldier on EU soil and they will have all of Europe eating out of their hands!!

Posted by Drew22 | Report as abusive

“the fear could become self-fulfilling.”

It is remarkable how hurtful markets are, always making bad situations worse, always over-inflating. And the real problem is that the pain they inflict in real pain on real people. Does anyone remember the S&L crisis? Seems like there’s no solution to the problem. I think the term “greedhead” first appeared where I live. No moderation. No sanity. “Knee-jerk panic.” Indeed. Good lord, what percentage of the world economy is Greece? Approximating zero? As much as New Jersey? It would all be laughable if it didn’t hurt so many people.

Posted by dpdpdp | Report as abusive

What happened to the 419-scam comment I saw this morning ?

Catch22, the Russians already manipulate them with gas supply. By 2012 we should be back on a barter system. We over consumed on non-capital items, funded it with credit, now we have nothing to show for it, except debt.

pdbdpb, I am pyslexic, cool it, I agree with you for the foreseeable future, but I would like to see a table with roll-over dates of world debt, splitting it into capital and interest portions. No wonder Obama wants to bypass the Moon and go to Mars.

Posted by Ghandiolfini | Report as abusive

Russia has been manipulating Europe with gas for years. We should be back on a barter system by 2012, time to buy commodities, gas bottles, water and cans of food, and can openers.

We bought non-capital goods on credit and now we have nothing to show for it, except debt.

Posted by Ghandiolfini | Report as abusive

Why should it matter if rates on Greek debt are 14%? The Greek gov’t is gonna buy/swap debt with the ECB @5% for the next three years… seems like these speculators are shooting themselves in the foot, or over-shooting the problem to make more $$ when the rates slide again.

Posted by CDNrebel | Report as abusive