Greece is going belly-up. So goes the Euro?

Seems as though its borrowing capacity has dried up and no wonder, when the country’s entire workforce has gone on strike in protest of cuts in government spending. Lenders no longer believe that there will be any financial discipline over there, and want to be paid huge premiums if they are to risk their money. So does this drag down the Euro? What am I, a philosopher? I don’t know, but the Euro always seemed like a Potemkin village to me, and I wouldn’t be surprised if it falls apart in the coming months.

Investors say that under the current circumstances, any Greek bond issue would need to carry an interest rate of around 7 percent to be successful. That is almost a percentage point more than the rate investors received in the previous Greek bond sale, in January, and a full 3 percentage points more than Greece’s borrowing cost before the current crisis.

That Greece may have to raise funds at such a high premium — comparable German bonds, the European benchmark for safety, currently pay 3.1 percent — underscores the severity of the crisis.

The wide differential, or spread, also indicates investor skepticism about the Greek government’s ability to meet E.U. demands to lower its budget deficit from 12.7 percent of gross domestic product to under 9 percent this year.

“Even if they bring the deficit to zero, with interest rates at 6.5 percent and a growth rate of zero at best, Greece’s debt ratio remains on an explosive path,” said Miranda Xafa, a former executive board member at the International Monetary Fund.

“I just don’t think they can raise funds from the market now,” she said. “They need to borrow at lower rates.”

10 Comments

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10 responses to “Greece is going belly-up. So goes the Euro?

  1. Anonymous

    Aside from the Germans, always tough to tell when the lil fellas in EU/UK go on strike since they hardly work even when not on “holiday” or hungover or on a smoking break or an extended lunch

  2. out looking in

    The euro still remains the sum of its parts- germany, france, etc…spain is the key player in the potential demise of the euro…i would not bet on it- too much political will expended on putting it together…remember, the dollar is also the sum of its parts (think CA, MI, IL, NJ)…no less a basket case….

  3. out looking in

    and that is THE problem….we would be much better off without the Fed…plus the Europeans can pull a page or two from Bernanke’s book by having some controlled subsidiary take down the entire bond issue in exchange for Greek promises to behave (which of course would be a Trojan horse)…

  4. Brid

    ECB – European Central Bank

  5. Pan

    CF,

    Greece is doomed. It’s imploding as we speak. I have access to greek newspapers and television and it seems the whole country is in total denial. They are incapable of understanding their plight. They blame the “capitalists”, the “speculators”, the germans–everyone else except the real authors of their plight–themselves.

    Their tragedy will be complete when they–and believe me they will–blame Bush for their problems!

  6. out looking in

    Brid- CF meant a bank with a printing press…

  7. Arouet

    oli, are you saying the US would be better off if the different states had different currencies? I agree that the dollar in the NE is worth a lot less than the dollar in the SE, for example, but is having different regional currencies with an inter-US currency market (like the EU before the Euro) the right answer?

  8. out looking in

    Arouet-

    Not at all….in the end, paper (or fiat) currency simply represents a store of value/medium of exchange issued by an authority that has the faith of those willing to accept it in exchange for goods or services…so just as one looks through to Greece when analyzing the euro, one too should look through to the states when analyzing the dollar… a few months ago it was trash and heading to zero, remember? Cali bankrupt, IL/NY/NJ fiscal basket cases….Greece reps only a few % of eurozone GDP- Spain more like 9%…if the euro should break up, one would expect to receive marks, francs, gilders, etc at ratio established at the time of the euro formation….i would be happy to take 2% drachma and 45% Dmarks..but it is the pesetas and lira that would cause me the greatest consternation…i’ve traded fx professionally for a few decades…when the euro was launched it was going to zero vs the dollar, then just before the crisis the dollar was going to zero vs the euro…in the end, we are still in the upper end of the roughly 0.85-1.60 range since inception….so a trip back down to parity would be greatly appreciated by the EU and a problem for the Hobama-ites…

  9. shoeless

    Beggar-thy-neighbor is the only policy central banks can all agree on. Problem is they can’t all get what they want at the same time.