Harvard Professor says More EU Nations Will Need Bailouts
Former IMF economist and Harvard professor Kenneth Rogoff said that Greece will in all likelihood not be the last EU member to need a bailout. Rogoff said that Ireland, Spain and Portugal are “conspicuously vulnerable.” Rogoff told Bloomberg, “It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three year. The budget cuts needed in Europe in many countries are profound.” Irish, Spanish and Portuguese bond yields rose and investors remained concerned about massive deficits in the three EU member nations. Last Friday Greece requested the activation of a 45 billion-euro ($60 billion) EU/IMF rescue package. All three EU countries have the highest debt to GDP ratios in the euro zone. Ireland’s deficit was 14.3% of GDP followed by Spain at 11.2% and Portugal at 9.4%. Currently Greece’s debt to GDP is 13.6%, the second highest in the euro zone. Rogoff said that the chances of other EU members needing a bailout is, “better than 50-50” and expects Greece to need more money than the original aid package provides.
Greece Needs More Austerity Measures says German Chancellor
The euro fell against most major currencies on investor concerns that the Greek bailout will not prevent Greece from defaulting. The euro fell to its lowest level since January after German Chancellor Angela Merkel said that Greece will have to adopt even more austerity measures to obtain German approval for the EU aid package. Alan Ruskin of Royal Bank of Scotland Group Plc stated, “The market doesn’t like the way the Germans are talking. There’s a complete lack of confidence in Greece. Worse and more worrisome from a euro standpoint is that contagion is continuing afoot.” Greek bonds were hammered and the premium investors are demanding to hold Greek debt exceeded 12%. The dollar advanced on the yen as investors speculate that the US Federal Reserve will withdraw stimulus measures as US recovery gathers steam.
Euro May Fall Below $1.30
According to some analysts the euro will fall below $1.30 this year if the Federal Reserve raises interest rates sooner than European policymakers. Mansoor Mohi-uddin, a Singapore currency strategist stated, “If the Fed does hike before the European Central Bank and the banks of Japan and England, the dollar will become a growth currency again rather than a safe haven. This suggests euro-dollar and pound-dollar remain at risk in 2010 of falling well below our three-month targets of $1.30 and $1.48, respectively.”
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Greece Needs $60 Billion in 2010
Greece has finally asked that the loan mechanism agreed on by EU finance ministers earlier in April be activated. Greece may need as much as 45 billion euros ($60 billion USD) this year. The request came as borrowing costs for the debt stricken nation reached unsustainable levels. The yield on Greece’s two year note hit 11% and spreads are at unprecedented levels. The euro rallied gaining a modest 0.1% vs. the US dollar trading at $1.3306 but many analysts believe the aid package will do little to solve Greece’s long term problems. Daragh Maher of Credit Agricole CIB stated, “It’s a positive development in the short term. In the longer term, it’s just a sticking plaster over the situation. The euro has not seen a sizeable bounce. It shows investors remain uncomfortable with being bullish on the euro.” In a live broadcast Greek Prime Minister George Papandreou said, “It is a national and imperative need to officially ask our partners in the EU for the activation of the support mechanism we jointly created. The time that was not granted to us by the markets will be given to us by the support of the euro zone.” At this week’s G7 meeting Japanese Finance Minister Naoto Kan said that Europe asked the US and Japan for a show of support for Greece but did not request financial aid.
Trading Driven by Greek Concerns
Despite a rise in the German Ifo institute’s business morale index and a larger than expected increase in euro zone industrial new orders euro trading remains largely driven by Greek debt concerns. Ian Stannard of BNP Paribas stated, “It’s not economic fundamentals but the euro zone peripheries, especially Greece, that’s going to weigh on the market.” European Commission spokesman Amadeu Altafaj said that emergency loans to Greece will be processed as quickly as possible. Altafaj stated, “Everything is going to be done in such a way that the mechanism can be triggered as soon as (necessary) and as is necessary for Greece.” He said that interest rates on the loans would be calculated according to a formula worked out between EU finance ministers earlier this month. He also said that since the disbursement date was not known it was not possible to say exactly what the rates will be.
Austerity Measures Could Hamper Growth
European markets rallied briefly after the announcement as investors and analysts believe the loans are a short term solution to ongoing debt problems in the euro zone. Investors are also concerned that the imposition of further austerity measures could hamper growth and deepen Greece’s recession. Investors also worry that Greece’s problems could spread to other EU nations, most notably Spain and Portugal.
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Juncker Says Greek Austerity Measures ‘Ambitious and Credible’
Greece could face pressure to implement even more austerity measures when representatives of the EU, ECB and the IMF meet with the Athens government on Wednesday. The meeting was rescheduled due to disruptions in air travel caused by the massive ash cloud from an Icelandic volcano eruption. Eurogroup Chairman Jean-Claude Juncker told the Greek financial website Euro2day that 2010’s austerity measures are “pretty ambitious and look credible.” Juncker further stated, “During our talks with the troika (European Central Bank/European Commission/International Monetary Fund) on the Greek package, the possibility of new measures will be discussed.” The head of Greece’s employers’ association said he expects more cuts and newspapers predicted that tens of thousands of state contractors will find themselves without work. Most experts say that the IMF will demand further austerity measures as a condition for aid. Vassilis Korkidis, president of Greek Confederation of Trade, stated, “The IMF will certainly demand new measures for 2010, effectively proving that the current stability plan is not sufficient. The strategy of domestic deflation will plunge us further into recession.”
Greek Bond Spreads at Record Levels
Should the ash cloud continue to disrupt air travel a spokesman for the European Commission said that participants may hold a video conference. The IMF said the talks should last about fifteen days and any agreement reached would be finalized in a matter of days. On Monday Greek Finance Minister George Papaconstantinou said, “These talks are very important because they will make it possible for us to move very fast if the Greek government decides on the activation of the mechanism.” Juncker said the aid package provided by the EU and IMF would be on common terms. Juncker stated, “In no way will there be different terms from the euro zone and other ones from the IMF.” High borrowing costs are hampering Greece’s ability to finance its debt in a sustainable manner. On Monday the premium investors are demanding to hold Greek debt instead of German Bunds hit a record 482 basis points, up 40 points from Friday’s close. Juncker tried to reassure investors and stated, “What I must say is that the euro zone will assume its responsibilities. We have said it many times, there is European money when it becomes necessary.”
Borrowing Costs Driven by Speculation
Billionaire investor George Soros said that Greece’s high borrowing costs are being driven by speculation. On a news show Soros said that it will probably be necessary for Greece to tap the loan package. Soros stated, “I think it is necessary because the market interest rate is really far too high to make it possible for Greece to meet the conditions that are required of it.”
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Most Believe Greece Will Seek Aid
Greece will decide sometime during the next few weeks whether to activate the loan mechanism agreed on by EU finance ministers last Sunday. On Monday the Athens government will begin talks with EU, ECB and IMF officials to clarify details of the agreement. Greek Prime Minister Papandreou told reporters, “We will have to make a decision about whether we activate this mechanism in the next few weeks.” Most investors believe Greece will seek outside aid as high borrowing costs are hampering Greek efforts to solve its fiscal crisis. The ambiguity surrounding the loan mechanism has caused investor concern and some are worried that the parliamentary approval required in some euro zone nations could prompt delays in the implementation of the loan mechanism. Some are worried that Germany, where political opposition to the aid package is widespread, could delay approval unnecessarily. Greek Finance Minister George Papaconstantinou indicated that it would take “one week, two weeks maximum” for the implementation of the loan mechanism. Papaconstantinou stated, “We are quite comfortable that once the framework is in place, meaning the program together with the financing elements, we will be able to move very fast.”
Loan Package Not a ‘Bailout’ Says Papandreou
In March the Athens government cut the pay of about 600,000 public sector workers raised taxes and cut pensions. The austerity moves prompted widespread unrest throughout Greece complete with strikes, protests and demonstrations. The European Commission said that Greece should not need to implement more austerity measures if the country taps the aid package. Greece’s central bank governor said the country should speed up deficit cuts by closing several “loss-making and spendthrift” government agencies. Bank of Greece Governor George Provopoulos told reporters, “This is how we will manage to positively please the markets by ourselves, by reducing the deficit by 5 percent (of GDP), instead of the 4 percent we have pledged for in the Stability and Growth Plan.”Prime Minister Papandreou said the loan package was not a bailout and but would give Greece time to solve its problems. Papandreou stated, “It gives us the room to maneuver to make the necessary changes to make our economy a viable one.”
Risk Aversion Pushes Dollar Higher
Concerns about how Greece will resolve its debt crisis has pressured the euro since late last year. The crisis has prompted a rise in risk aversion which has benefitted the US dollar and the yen. On Friday the euro fell 0.3% vs. the US dollar to $1.3533 and the euro fell 0.8% against the yen. Markets are closely watching this weekend’s EU conference in Madrid and will be monitoring Monday’s talks between Greece and EU/IMF officials.
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Markets Not Convinced by Aid Package
The euro fell on Thursday (April 15th) as Greece’s borrowing costs rose prompting concerns that Greece will have trouble servicing its debt. The Greek/German bond spread widened to near record levels putting the troubled euro on track for the largest fall vs. the US dollar in three weeks. EU finance ministers agreed last Sunday on a loan package of 30 billion Euros from the EU and an additional 15 billion Euros from the IMF. Boris Schlossberg of GFT in New York stated, “Markets are not pacified by the bailout package agreed upon last weekend and still consider Greece to be a high default risk.” Recent news reports state that Greece has asked for talks with the EU and the IMF. In a letter sent to the European Union, the European Central Bank and the IMF, Greek Finance Minister George Papaconstantinou asked for talks on “a multi-year program of economic policies.” Papaconstantinou also said that the multi year program “could be supported with financial assistance from the euro-area member states and the IMF, if the Greek authorities were to decide to request such assistance.”
IMF, European Central Bank, European Commission to Meet in Athens
The International Monetary Fund said it will send representatives to Athens on Monday and would be joined by representatives from the European Commission and the European Central Bank. Representatives of the Athens government and IMF officials said that Greece has not decided whether to ask for emergency loans. IMF spokeswoman Caroline Atkinson said that the IMF will focus on Greek policies that could prompt a request for outside aid. Atkinson stated, “When we’re discussing with them the policies that could form the basis, at a certain point that could mutate into a discussion for the (financial) arrangement.”Some analysts say that borrowing costs faced by Greece are unsustainable and that Greece may have no choice but to seek outside aid. Ben May of Capital Economics stated, “The fact that they are asking for clarification on various issues about the mechanism suggests that they are seriously considering activating the package.”
Loans at Below Market Rates
Greek Prime Minister George Papandreou told his cabinet that the nation’s debt crisis, “has created psychological terrorism in our economy and among Greek citizens and we have to deal with that. We must ensure safety and confidence.”EU governments have said that they would provide Greece with three year emergency loans at a rate of 5% which is less than the 7% demanded by investors to hold Greek debt. The EU decision to provide loans would have to be a unanimous decision by all 16 EU nations and markets are concerned that Germany may block or delay the loans.
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