Thursday 19 October 2017

Debt Crisis: Greece’s future in eurozone in doubt, Spain feels heat

Julien Toyer and Luke Baker

SPAIN paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, and EU officials said Greece had little hope of meeting the terms of its bailout, casting fresh doubt on its future in the eurozone.

Spain's increasingly desperate struggle to put its finances right has seen its borrowing costs soar to levels that are not manageable indefinitely, reflecting a growing belief that it will need a sovereign bailout the euro zone can barely afford.



It has become the recent focus for investors, but Greece - where the sovereign debt crisis began - remains a powder keg.



If Athens were to default or exit the euro zone, the knock-on effects could push Spain and even Italy over the edge.



With inspectors from the EU, European Central Bank and International Monetary Fund returning to Greece to decide whether to keep it hooked up to a €130bn lifeline or let it go bust, three EU officials said they were likely to conclude Athens cannot repay what it owes, making a further debt restructuring necessary.



This time, the European Central Bank and euro zone governments would likely have to take a hit on some of the estimated €200bn of Greek government debt they own if Athens is to be put back on a sustainable footing.



But there is no willingness among member states or the ECB to take such dramatic action at this stage.



"Greece is hugely off track," one of the officials told Reuters, speaking on condition of anonymity. "The debt-sustainability analysis will be pretty terrible."



Prime Minister Antonis Samaras said Greece's economy could contract by more than 7 percent this year, pushing debt-cutting targets further out of reach, but he pledged to stay the course.



"There are certainly delays in this year's agreed programme, and we must quickly catch up," Samaras told party colleagues.



"Let's not kid ourselves, there is still big waste in the public sector, and it must stop."



Underlining the pressure on the euro zone, Moody's Investor Service lowered the outlook on the EU's temporary bailout fund, the European Financial Stability Facility (EFSF), after threatening the top-notch credit rating of three of its main backers, including Germany, earlier in the week.



The Spanish Treasury sold the €3bn of three- and six-month bills it was aiming to, though yields climbed; the six-month paper jumped to 3.691pc from 3.237pc last month.

"The most important takeaway from this auction is that Spain was able to get all its debt out the door," said Nicholas Spiroof Spiro Sovereign Strategies. "Still, in March, Spain was able to issue six-month debt at a yield of under 1pc. Now it is paying 3.7pc."



Spain had cushioned itself by securing well over half its annual debt needs in the first six months of the year when market conditions were more benign, but that advantage has evaporated as its funding needs for the rest of the year have grown.



On Friday, the government said it expected the economy to remain in recession well into next year, while the autonomous region of Valencia became the first to ask Madrid for aid to pay debt obligations it cannot meet. Others are expected to follow.



Spain's northeastern region of Catalonia, responsible for a fifth of the country's economic output, admitted it had financing needs to meet while its access to markets was shut, but had not decided yet whether to tap a state liquidity line.



BOND MARKET MESSAGE



On the secondary market, Spanish five-year government bond yields rose above 10-year yields for the first time since June 2001. Having to pay more to borrow shorter-term rather than longer-term is usually a sign that markets think the risk of a default or debt restructuring has increased.



"The spread between 5- and 10-years moved to negative today, which is a classic sign that the market thinks the current trends are unsustainable for Spain's fiscal dynamics," said Nick Stamenkovic, bond strategist at RIA Capital Markets.

Reuters

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