Bloomberg | April 28, 2010 | 13:12 EDT
German Chancellor Angela Merkel and the International Monetary Fund pledged to step up efforts to overcome the Greek fiscal crisis as Standard & Poor’s downgraded Spain and investors sold bonds in Europe’s most indebted nations. “It’s completely clear that the negotiations between the Greek government, the European Commission and the IMF need to be sped up now,” Merkel said in Berlin today. Flanked by IMF Managing Director Dominique Strauss-Kahn, she said the “stability of the euro zone” was at stake if a 45 billion-euro ($59 billion) loan package for Greece can’t be delivered fast. A failure by policy makers to match such talk with action has fanned concern that the crisis will spread beyond Greece. Merkel has delayed German approval of loans in the face of voters’ opposition and S&P today cut Spain’s credit rating, a day after it dropped Greece to junk status and downgraded Portugal. The euro fell to the lowest in a year. “The hesitant and haphazard reaction of euro-zone policymakers to Greece’s predicament underscores the dangers of contagion,” said Marco Annunziata, chief economist at UniCredit Group in London. “The euro-zone has taken over six months to react and is allowing uncertainty to persist. This does not bode well for their ability to react quickly should a second flashpoint burst.”
Need for Action
Speaking in Berlin, European Central Bank President Jean- Claude Trichet said the stability of the “euro zone is impacted” by the delays in delivering the Greek aid, “underscoring the need for action.” Strauss-Kahn told reporters that “every day that is lost is a day where a situation is getting worse and worse.” European stocks and bonds rallied earlier after a German lawmaker stoked speculation that Greece would get as much as 120 billion euros from the EU and the IMF, only for the Spanish downgrade to dash that optimism. The euro dropped 0.2 percent to $1.3143 and Spain’s IBEX 35 Index plunged 3 percent to 10,167 points, the lowest in two months. The yields on Spanish, Greek, Portuguese and Italian 10- year bonds rose. Spain had its credit rating cut one
step by Standard & Poor’s to AA, putting it on a par with Slovenia. S&P said in a statement that the outlook on Spain is negative, reflecting the chance of a possible further downgrade if the “budgetary position underperforms to a greater extent than we currently anticipate.” Spain was last cut by S&P in January 2009.
“If you are in a situation where every single country in the peripheries is downgraded, and this is allowed to continue, then obviously the risk is that the contagion will carry on spreading,” said David Owen, chief European Financial Economist at Jefferies International Ltd. The premium on Greek bonds surpassed 8 percentage points at one point today. The extra yield that investors demand to hold Portuguese 10-year bonds over bunds rose 59 basis points to 277 points yesterday, the most since 1997, before slipping 1 point today. The spread on Spanish debt increased to the most in more than a year yesterday before dropping 2 basis points today. The German delay on approving Greek aid exacerbated the crisis this week. While Green Party lawmaker Juergen Trittin quoted Strauss-Kahn as telling German deputies it may be as much as 120 billion euros, the IMF chief later declined to publicly say how much aid Greece will require. Germany may make a final aid decision on May 7 when the upper house of parliament could approve its share of the package, German Finance Minister Wolfgang Schaeuble said at the Berlin press conference.
Contagion from the Greek crisis is “threatening the stability of the financial system,” Organization for Economic Cooperation and Development Secretary General Angel Gurria said in an interview with Bloomberg Television in Berlin today. “This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.” As Greece waits for its euro-region partners to disburse funds, the European Union hasn’t announced concrete plans to help other nations should aid be needed. Negotiations on the conditions to be attached to Greece’s aid package continued today in Athens and Trichet said he expected them to be concluded by the weekend. The crisis has highlighted the absence of a common fiscal policy to cement Europe’s monetary union, frustrating Trichet’s efforts to promote a “common destiny” for its 16 members. Greece’s budget deficit amounted to 13.6 percent of gross domestic product last year, the second-highest in the euro region after Ireland and four times Germany’s shortfall. Ireland’s shortfall was 14.3 percent and Spain’s 11.2 percent.
Aid to Greece faces opposition in Germany, where state elections are due in North Rhine-Westphalia on May 9. Almost 60 percent of Germans don’t want to help Greece, Die Welt newspaper reported, citing a survey of 1,009 people. International concern is also growing. The Greek situation is “of great concern” to President Barack Obama, White House spokesman Bill Burton said today. Canadian Finance Minister Jim Flaherty told reporters in Ottawa that the crisis is a “significant concern” and that support needs to be provided “sooner rather than later.”