Greek bailout leaves markets cold
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.