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business newsThe ECB Rules Out Greek Default, While Contagion Fears Spread in Spain and Italy
By
Matthew Mallon
May 24, 2011 10:30 am
Any serious slip by Italy or Spain would take the eurozone sovereign debt crisis to a whole new level.
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French ECB council member Christian Noyer was the latest of the bank’s officials to step up to the plate and declare Greek default unacceptable. “Restructuring is not a solution, it’s a horror story,” he told reporters in Paris on Tuesday, reiterating previous thundering statements by fellow executive council members Juergen Stark and Lorenzo Bini Smaghi that the ECB would no longer accept Greek sovereign debt as collateral if any such action -- including “soft restructuring” options such as debt extension -- took place. Moody’s Investor Services also chimed in on Tuesday, saying that a Greek default would likely downgrade sovereign debt issuers across the continent.
The sole option for Greece, according to Noyer and his fellow ECB members? Austerity, austerity, austerity. “The only solution is ambitious privatization,” Noyer said. “It is necessary to have the equivalent of an internal devaluation. Cut production costs. There is no other solution.” But the market isn’t buying that story. On Monday, the Greek government brought in another package of cuts and asset sell-offs, and saw credit-default swaps on its debt increase 33 basis points while its yield on 10-year debt didn’t budge from 17%.
The continued uncertainty over Greece’s future took its toll on world markets, battering the euro and raising more contagion fears about the two as-yet-solvent PIIGS: Spain and Italy.
Italy, which has kept itself out of the headlines for much of the crisis, was put on watch by credit ratings agency Standard & Poor’s this week, which revised its outlook for the country from “stable” to “negative” over fears about slow growth and post-Bunga-Bunga political deadlock this year. As the eurozone’s German-led boom starts to ebb, you can only expect more warnings like this.
Meanwhile, in Spain, politics made markets nervous. Sunday’s disastrous regional and municipal election results for the Spanish government were hardly unexpected. Prime minister José Luis Rodríguez Zapatero – who has already announced that he will be stepping down as party leader before next year’s general election -- and his minority Socialist government are wildly unpopular, largely because of the austerity measures they have had to impose on the country since the eurozone’s fiscal meltdown began. In the face of an intractably stagnant economy and one of Europe’s highest unemployment rates, Zapatero has managed to bring stave off a Spanish bail-out (so far), but at the cost of his party’s foreseeable electoral future.
Expected or not, the election results sent a mild chill through the markets, driving up the spread on 10-year Spanish bonds to a five-month high on Monday, before cooling off on Tuesday, which saw the Spanish easily sell off 2.3 billion euros worth of short term debt at rates little changed from the last auction.
While various analysts warned that the new regional administrations will uncover mountains of hidden debt -- as happened in Catalonia last November, when an incoming regional party discovered a budget deficit left by the outgoing Socialists that was twice its declared size – Deutsche Bank estimated that regional hidden debt would be likely to only add 0.2 percentage points to the overall deficit. Others worried that a loss for the Socialists would throw a spanner in their austerity plans, though Zapatero rejected any suggestion that the results would derail his government’s ongoing reforms.
So no Spanish tailspin just yet. But any serious slip in fortune by Italy or Spain would take the eurozone sovereign debt crisis to a whole new level. And the longer that the Greek issue remains unsolved, the deeper the visible cracks between eurozone players and their solutions, the more chance that Spain, especially, will start to wobble. Spanish 10-year bonds were already dangerously close to resistance levels on Monday. A little push and they’ll go -- and Greece’s current problems will be a fond memory.
No positions in stocks mentioned.
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