Greek crisis edges closer to disaster as debt yield keeps rising
Published 09/04/2010 | 05:00
THE threatened Greek borrowing crisis is about to become reality, international economists warned yesterday, as the interest rate on Greek government debt rose to an 11-year high.
"Europe's gamble has failed spectacularly," said Nick Kounis, chief European economist at Fortis Bank in Amsterdam in a research note.
The yield (rate) on Greek debt rose to 8pc at one point yesterday -- almost 5pc more than the equivalent on German government debt -- before easing back to around 7.3pc.
"The surge in yields makes it even less likely that Greece will be able to get out of its fiscal black hole without a real helping hand," said Mr Kounis.
The Greek government must borrow €12bn before the end of next month just to replace existing loans and cover its deficit.
Its finance minister George Papaconstantinou said this week that last year's deficit will be "at least" 12.9pc of GDP -- up from the previous estimate of 12.7pc.
He said Greece did not need to seek financial help, despite the increase in borrowing costs.
EU governments had hoped that Greek interest rates would fall after an agreement on March 25 to set up a €30bn loan facility, involving a mix of loans from states within the eurozone and the International Monetary Fund.
However, there is no agreement on the interest rate that would be charged by the euro states. European Central Bank president Jean-Claude Trichet said yesterday that it could be at the rate those countries could borrow at themselves.
A report in the 'Financial Times' said Greek banks lost almost €10bn in deposits in the first two months of the year.
"If this is the case, it is the classic picture of a population that has decided its government intends to devalue -- in this case, leave the euro," said Gabriel Stein, of Lombard Street Research, in a note.
He added: "If these trends continue, the process could acquire a momentum of its own and become unstoppable."
Shares in Greek banks fell heavily after reports that the banks had asked the government for the remaining €17bn of a €28bn support scheme that was launched in 2008 to help them cope with the credit crisis.
"Something has got to give," said Robin Marshall, director of fixed income at Smith & Williamson Investment Management in London.
"Yields at these levels raise the risk that Greece might have to get help in order to access funding at a subsidised rate."
Stephen Jen, managing director at BlueGold Capital Management in London and a former IMF economist, has said a default may be "unavoidable without extraordinary financial assistance".
"The crash has not occurred yet but it is coming," wrote Steve Barrow, head of Group of Ten currency strategy at Standard Bank, in a report.
"Efforts to avoid a crash seem doomed to failure, whether it's emergency loans or some other initiative."