Monday

27th May 2019

Spain downgraded as eurozone turmoil spreads

  • Cranes over the Sagrada Familia cathedral in Barcelona: the Spanish housing and construction sectors have collapsed in the global financial crisis (Photo: vgm8383)

Spain on Wednesday (28 April) became the latest eurozone country to suffer a credit rating downgrade, as contagion from the Greek debt crisis appeared to be spreading rapidly.

Credit ratings agency Standard and Poor's cut its rating for the euro area's fourth largest economy from AA plus to AA, sending Spanish 10-year bond yields up to 4.127 percent and causing shares on the Madrid stock market to tumble by 3 percent.

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Only a day earlier the same agency caused widespread financial turmoil when it cut ratings for Greece and Portugal. Greek Prime Minister George Papandreou said the EU "must prevent a fire ...from spreading to the entire European and world economy."

Others suggested that the contagion is already well and truly under way. "Contagion has already happened," the head of the OECD, Angel Gurría, told Bloomberg News. "This is like Ebola [virus]. When you realise you have it you have to cut your leg off in order to survive."

German Chancellor Angela Merkel added to the greater sense of urgency, following meetings with IMF chief Dominique Strauss-Kahn and ECB President Jean-Claude Trichet in Berlin.

"It is perfectly clear that the negotiations [in Athens] with the Greek government, the European Commission and the IMF need to be accelerated," she said. "We hope they can be wrapped up in the coming days and on the basis of this, Germany will make its decisions."

With less than two weeks left to go to a crucial regional election in Germany's North Rhine-Westphalia state, Ms Merkel has made it clear that any bilateral loans to Greece depend on Athens first producing a detailed budget savings plan for 2011 and 2012.

But signs emerged on Wednesday that the talks in Athens, designed to construct a lending plan set to contain such details, had reached an impasse.

Greek labour minister Andreas Loverdos told journalists that the government was unhappy with EU and IMF demands to cut salary bonuses in the private sector. "We have been asked for a cut which we do not accept," he said.

Latest reports suggest the negotiators are discussing a three-year loan to Greece that could amount to as much as €120 billion in total, with euro area states and the IMF agreeing earlier this month to provide up to €45 billion to Athens this year alone.

Contagion

The European Commission has underlined that the current talks are designed to create an 'ad hoc' support mechanism for Greece only, despite difficulties in the other eurozone countries. The EU executive body will come forward with proposals in May, intended to prevent a repeat of the current fiscal crisis by tightening up the bloc's budgetary rules.

Portugal is seen by markets as the country most likely to follow in Greece' footsteps. Its socialist Prime Minister Jose Socrates called in opposition leader Pedro Passos Coelho for an emergency meeting on Wednesday, with the two men agreeing to co-operate during the fiscal crisis.

Ireland too is seen as vulnerable, after the western isle recently posted the eurozone's largest budgetary deficit in 2009, at over 14 percent of GDP. The country's bond yields also rose on Wednesday.

Despite repeated assurances from Europe's politicians that Greece would not be allowed to fall, investors have grown increasingly concerned by the prospect of a restructuring of Greek debt.

Such a prospect would likely cause further writedowns for many of the EU's largest banks, which are already reeling from the recent financial crisis. Analysts say French, German and Swiss banks are among the worst exposed.

"If Greece defaults, that means the pressure will then be felt and exerted on national banks that hold Greek debt. That includes very many German, French and Swiss banks and it just may be that with so many banks involved one of these might just go down," Howard Wheeldon of brokerage firm BGC Partners said in the Guardian newspaper.

The banks Fortis, Dexia, CASA and Societe Generale also stand among the potentially most at risk, said economists, due to the size of their holdings of Greek debt.

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