Deepening Greek crisis puts 'stability of eurozone at stake'
Irish Government debt interest rates rise faster than those of Portugal or Spain
Published 29/04/2010 | 05:00
EFFORTS to save Greece became efforts to save the euro yesterday as Spain -- the euro area's fourth largest economy -- was downgraded by ratings agency Standard & Poor's.
Irish Government debt took a hammering on bond markets, with interest rates rising faster than those of either Spain or Portugal.
The head of the Irish debt agency pointed out that Ireland does not need to borrow on the panicky bond market at present.
"At this point of time we have a total borrowing of about €20 billion for this year. We're in very comfortable circumstances," National Treasury Management Agency (NTMA) managing director John Corrigan said.
But the NTMA will have to decide whether to hold its customary bond auction of up to €1.5bn next month. Not doing so could be seen as a sign of fear, but an unsuccessful auction could be even more damaging.
A smaller auction than usual might also be an option. Mr Corrigan said the NTMA has scope to vary the amount of bonds offered.
After a meeting with the managing director of the International Monetary Fund (IMF), Dominique Strauss-Kahn, in Berlin, German Chancellor Angela Merkel said the "stability of the eurozone" was now at stake.
"We need to act swiftly and strongly," Ms Merkel said. "It's completely clear that the negotiations between the Greek government, the European Commission and the IMF need to be speeded up."
Any rescue of Greece is deeply unpopular in Germany and Ms Merkel faces regional elections on May 9. But it is not clear that markets will wait that long for signs of swift and strong action.
After meeting Mr Strauss-Kahn and Jean-Claude Trichet, president of the European Central Bank, German MPs said they were told Greece would need assistance of up to €120bn over the next three years.
The €45bn already agreed was enough only for the first year of support, they said.
Mr Strauss-Kahn did not dispute the figure but said it was too soon to give details as the rescue package was not yet finalised. But he stressed the urgency of the situation.
"It's not easy; every day which is lost, the situation is going worse and worse. It can also have consequences far away. We are confident we can fix it. But if we don't fix it in Greece, it may have a lot of consequences for the EU."
The cut in Spain's credit rating followed a reduction to "junk" for Greece, and a two-notch cut for Portugal, by S&P on Tuesday. The agency has Ireland on "negative watch" for a downgrade, although Irish analysts say the risk of serious debt repayment problems is small.
"A funding crisis this year is an unlikely possibility in relation to Ireland," said Goodbody Stockbrokers economist Deirdre Ryan. Rossa White, chief economist at Davy Research, said the bond market reaction was overdone, but it would help if the Government gave more detail now on its fiscal correction plans for next year.
One of Europe's best known economists Willem Buiter of Citi, said he did not expect Ireland to be tested too severely by the markets, despite rising Irish bond yields, "barring a sudden and implausible implosion of the collective common sense displayed in the past year."
This was in contrast to comments this week by Kenneth Rogoff, the former chief economist at the IMF, who said Ireland was "conspicuously'' vulnerable to a sovereign debt crisis.
There will be concern that S&P highlighted what it sees as Spain's poor growth prospects. The outlook for the Irish economy, rather than budget deficits or bank rescues, has been the focus of rating agency reports on Ireland.
"We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," analyst Marko Mrsnik wrote.S&P now forecasts that Spanish growth will average 0.7pc a year from now until 2016, down from a previous 1pc.