EU estimate of debt problem is a hammer blow for Greece
Greece took hammering in the markers yesterday after the EU raised its estimate of its budget deficit for last year. The EU said Greece's public deficit stood at 13.6pc of output last year -- much higher than a government estimate of 12.9pc while the yield, or interest rate demanded by investors, on Greek 10-year bonds jumped to 8.921pc.
The country's bonds plunged with two-year yields topping 10pc for the first time since 1999, while the euro approached a one-year low against the dollar and stocks sank as swelling European budget deficits threatened the global recovery.
"Today's rise in Greek bond yields is GUBU stuff," said Donal O'Mahony, global strategist at Davy Research. "It reflects the fact that, even though a rescue package is under way, the EU has muddied the waters by the way it was done. The bond markets are saying, 'Show me the money, before we buy any more Greek debt'.
"The Greeks have taken the right actions. EU leaders had a chance to use this as an opportunity, perhaps to strengthen budget surveillance in return for a good security blanket, but they've made a bit of a mess of it," he said.
In another blow to the country fragile state, credit rating agency Moody's, which cut Greece's debt rating from A2 to A3, warning that the country was likely to have to pay a high cost to stabilise its debt. The cut means Greece's debt rating is just four grades above junk.
Moody's also put a "negative" outlook on Greek debt, indicating it's more likely to cut it again than raise it or leave it unchanged. Moody's downgrade is likely to make it even more difficult for the Greek government to tap the bond markets for money.
The head of the International Monetary Fund said the debt crisis in Greece was serious and there would be no "silver bullet" to resolve the issue easily.
IMF managing director Dominique Strauss-Kahn said that negotiations with the IMF over conditions for a support package were just beginning and would take some time to come to a resolution.
Mr Strauss-Kahn said the IMF was not considering some type of restructuring of Greek debt that would make holders of the debt accept something less than full value for their loans. That worry has roiled markets in recent days.
"It is clear that the Greek situation is a very serious one," he said. "There is no single way, no silver bullet to solve it in an easy manner."
He was speaking in advance of discussions over the next three days among global finance officials including finance ministers and central bank governors of the Group of 20 nations. (Bloomberg)