Greece debt crisis
growing instability in the markets is raising the possibility that more countries on the weak periphery of the euro zone — such as Portugal, Ireland and Spain — could eventually become unable to issue debt at affordable prices.
This could force the zone’s rich governments to expand their emergency assistance in order to prevent a collapse of confidence in the euro currency, and to avoid debt defaults that would damage banks across the region.The contagion we are seeing at the moment to other euro zone countries should be taken very seriously. We start to see the dangerous crisis dynamics in which falling (bond) prices do not lead to rising demand but rather the opposite,”At the moment we believe that you can rescue Greece for 120 billion, but it could be 500-600 billion if you add Portugal and Spain to that.”
The yield on two-year Portuguese government bonds jumped over two percentage points in three days, to 5.48 percent. The curve for Portuguese credit default swaps, which insure against a debt default, is inverted, a classic sign that investors fear the country could face a liquidity crunch.
But the spike in its yield has prompted economists around Europe to try to work out the costs of a multi-country bailout in the event that the attempt to save Greece fails.officials aimed to announce the details of the scheme by Monday. Euro zone governments and the IMF are expected to extend emergency loans worth around 100 billion euros over three years. The IMF might provide as much as a third of the total.
If agreement is reached, however, markets may remain nervous about Greece’s ability to meet fiscal conditions attached to the loans, and about the political will of euro zone governments to support Greece over such a long period of time. So the market contagion could still spread further.
Estimated loans if contagion spreads
Greece : 100 billion euros
Portugal : 58.5 billion euros
Ireland : 38 billion euros
Spain 347 billion euros
Total : 544 billion euros (excluding Italy)
Italy estimated at : 724 billion euros
so in a worst case scenario 1.268 Trillion euros
Italy’s expected debt this year is to hit 117 percent of GDP, making it a potential victim if market turmoil worsens. European Commission and euro zone officials have stressed that the mechanism for Greece is a one-off solution.
Judging from the German public’s opposition to helping Greece, it might be very difficult politically for euro zone governments to agree to expand their bailout, even to one extremely small country such as Portugal.Many analysts think that to safeguard the euro currency, a tremendous diplomatic achievement, the euro zone will ultimately do what it takes to support its weaker members.At some point, the costs of a multi-country bailout could start to appear prohibitive, even when weighed against the costs of allowing one or more countries to default and perhaps leave the euro zone.
Compare the situation in the euro zone to the United States in 2008 and 2009, when it managed to get out in front of its own banking solvency crisis. Because the U.S. had a single fiscal authority it was able to quickly marshal forces for a bailout. Do not count on the ECB taking similarly extraordinary steps — for example by monetizing Greek debt by buying it up in the open market. The ECB has steadfastly maintained that it will not be the instrument of a bailout.
IMF Managing Director Dominique Strauss-Kahn declined to name a figure or detail how a package of aid would work, delaying until final arrangements with the Greek government are concluded. Meanwhile the problems that the IMF, Germany and the rest of us have to contend with are growing by the minute.
