No wonder world financial markets, especially equities, got the wobbles yesterday as Greece slid closer to default, a move that would damage the euro and the fragile European economic recovery.
Our market and those in Asia joined European and US markets in falling sharply, with some recording their biggest falls so far this year.
The sell-off slowed overnight, despite Spain’s credit rating being cut by Standard & Poor’s and another spike in interest rates.
Bond yields soared for the likes of Greece, Italy, Spain, Portugal and Ireland, and fell for the US as investors were reminded that risk is a risk for investors large and small.
After months of shrugging off the rising pressures on Greece and believing too much in silly assertions from commentators (most of them in the US) that the worst was over, markets have been given a very rude reminder that risk hasn’t been abolished, it’s only receded into the shadows.
So Europe’s worsening debt crisis is intensifying pressure on governments to widen its mooted bailout package beyond Greece after a cut in the nation’s rating to junk drove up borrowing costs from Italy to Portugal and Ireland.
Ratings agency Standard and Poor’s triggered the latest eruption of fear by slashing Greek debt to junk status, and it also cut Portugal’s rating by two notches; moves which came as a complete surprise.
Markets fell around the world with Europe seeing the biggest sell-off this year so far, and oil and copper and other commodities dropped as speculators abandoned risky investments for the safe heaven of US government debt. That in turn drove the euro lower and the US dollar higher.
Greece’s budget deficit is now 13.6% of GDP, possibly to rise to 14.1%; Ireland’s deficit was 14.3% of GDP last year, the highest in the EU. Spain’s was 11.2% and Portugal’s 9.4%. But Portugal has a lot of private debt, unlike Spain, Ireland and the other so-called PIG, Italy, which has a high level of domestic savings.
S&P cut its rating of Greek government debt by a full three notches to BB-plus, the first level of speculative of "junk" status.
The outlook is negative, meaning Greece could be downgraded again.
The rating is three to four notches under what Moody’s and Fitch suggest at the moment.
One of those will follow soon.
The S&P downgrade put Greece on par with Romania and below Kazakhstan, Hungary and Iceland, which all but collapsed after its banks imploded at the start of the global financial crunch in 2007.
To try and stop the rot the IMF suggested offering Greece another 10 billion euros on top of the 10 billion already on offer and the 30 billion from the EU, if Germany agrees .
But that puts Greece at the limit of the 25 billion euros the Fund can lend to it.
Much of the blame has to be laid at the door of Germany; its leader, Chancellor Angela Merkel, members of her government, the media and the country’s central bank.
They have said and done nothing to reassure markets that Germany’s 8.4 billion euro contribution to the Greek stabilisation package will be made.
Germany is therefore holding up final approval of a 45 billion-euro ($US60 billion) Greek rescue, so the crisis is spreading.
In its rating announcement, S&P assigned a recovery rating of "4" to Greece’s debt, indicating it expected an "average" recovery of between 30% to 50% for holders in the event of a Greek restructuring or default.
At worst European banks (with some in the US) would be looking at $US180 billion-$US200 billion in losses, before being forced to write-down the value of their holdings of other sovereign debt, plus their holdings of related debt.
The situation wasn’t helped by more outrageous comments from German politicians, especially from Chancellor Merkel’s coalition partner, the Free Democrats and populist reporting in German papers.
It’s as though German politicians are deliberately inflaming the situation, without understanding that should Greece default, and then Germany will lose, along with the rest of Europe and possibly the global economy as a whole.
Given the central and scandalous role Germany has played in sinking Greece, it is some how appropriate that its predicament was best summed up by this quote on Reuters from Thomas Mayer, chief economist of Deutsche, Germany’s biggest bank, who said overnight that Greece has entered "a death spiral of government insolvency".
Helped by German intransigence and chauvinism as the government of Angela Merkel jockeys to advantage in the campaigning for the vital poll in Rhineland North Westphalia on May 9. By the time that is over, Greece could very well have defaulted.
The Royal bank of Scotland wrote this week (and quoted on the FT website):
"We know which foreign banks have most exposure based on BIS data as at Q3: France has USD75b, Switzerland USD63b, and Germany USD43b (all European banks USD252b), the US USD16b and Portugal USD10b!
"For these banks, a restructuring would be imminently preferable to Greece leaving the EUR, where the mother of all asset-liability currency mismatches would send the “new Drachma”, not to mention the real economy, into a dramatic tailspin.
"In a full-fledged, Argentina-style default, investors would lose over half their money — an option that may be too severe for Greece to contemplate serious
