Contagion 'Madness'?

Chart from Bill Marsh, NYT (Source: Bank for International Settlements).

Emma Ross of Bloomberg reports, Greek Quarantine Tested as Spain Denounces Contagion ‘Madness’:

Investors are already testing the euro region’s efforts to contain the Greek crisis.

Greek bond yields yesterday rose above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area.

“If the execution of the announced measures in Greece faltered it would certainly make it more difficult to bring the sovereign debt markets of Spain and Portugal into calmer waters,” said Kommer van Trigt, who helps oversee 140 billion euros ($183 billion) at Robeco Group in Rotterdam. “We want to see more evidence that measures are really being implemented.”

European governments are hoping that Greece’s 110 billion- euro bailout will stop a crisis that Nobel Prize-winning economist Joseph Stiglitz says threatens the currency’s survival. Investors are speculating that Spain and Portugal may also eventually need assistance, prompting Spanish Prime Minister Jose Luis Rodriguez Zapatero to dismiss such talk as “complete madness.”

That didn’t stop a selloff in Spanish bonds yesterday. The extra yield that investors demand to buy its debt over German bunds rose 21 basis points to a 14-month high of 117.8 points. Spain’s benchmark IBEX Index, the euro region’s worst performer after Greece, fell 5.4 percent to the lowest since July. Portugal’s spread rose 40 basis points to 247 yesterday.

The euro weakened 1.4 percent to $1.3011, the lowest in more than a year.

Flights

Greek unions plan their third general strike of the year today after workers yesterday occupied the Acropolis and shut down schools and hospitals at the start of a 48-hour walk-out. Aegean Airlines SA, a Greek carrier, has canceled all flights.

Workers are protesting against the 30 billion euros of austerity measures agreed to by Prime Minister George Papandreou in return for the bailout from the euro region and the International Monetary Fund. Protesters will meet at Pedio tou Areos Park in central Athens and will march through Constitution Square, where the Parliament is situated.

“We will continue with action as long as these measures, which go against workers and are anti-social, continue to be demanded,” Stathis Anestis, a spokesman for the GSEE union, said in a telephone interview, predicting “massive participation.”

The yield on Greece’s 10-year bond climbed 90 basis points to 9.84 percent yesterday compared with 9.343 percent on April 30.

Greek Opposition

More than 51 percent of Greeks said they won’t accept new austerity measures before the rescue deal, according to a poll of 1,000 people by ALCO for Proto Thema newspaper. That compared with 33 percent who would accept them. No margin of error was given for the poll, which was conducted from April 27 to April 29.

Unions have had some success influencing policy in the past. In 2001 they forced then-Prime Minister Costas Simitis to dilute proposals such as raising the retirement age. In 1985, unions successfully opposed a government proposal to cut spending and boost tax revenue, prompting Simitis, who was economy minister at the time, to resign two years later.

Some economists say the terms are too harsh for the country to bear. Greece expects its economy to shrink 4 percent this year and 2.6 percent in 2011.

“The economic pain that such belt tightening will bring suggests that it would be unwise to rule out a default further down the line,” Ben May, an economist at Capital Economics in London, said in a note.

Wrangling

The danger for the euro region is that failure to fix the Greece crisis after three months of wrangling by EU leaders will prompt investors to shift attention to the deficits of Portugal and Spain and dump their bonds too. Spain’s budget deficit was the third-highest in the euro region last year, at 11.2 percent of GDP. Portugal’s shortfall was the fourth at 9.4 percent of output.

The IMF yesterday published a statement denying speculation that Spain had asked for a bailout.

“These rumors can increase the interest-rate differential compared with German bonds and damage our national interests,” Zapatero told a news conference in Brussels yesterday. “This is simply intolerable and I can tell you that we will certainly combat it.”

Ireland had the highest deficit at 14.3 percent and Greece’s was 13.6 percent.

While the Greek rescue “may work for a little while, in the long run the fundamental institutional problems are there, speculators are aware of these problems,” said Stiglitz, a Columbia University professor, in an interview with BBC Radio 4 yesterday. “The future of the euro may be limited.”

Everywhere you look, everyone is talking about "contagion" and the beginning of a wave of sovereign debt defaults. I tend to agree with Spain's Prime Minister that what is going on right now is "complete madness". Spain's banks are among the best in the world and they got trashed on Tuesday.

At times like these, I like to take a step back and listen to reason. In a sea of cacophony, very few have the insight of William Engdahl. Watch both interviews below and listen carefully to his thoughts on Eurozone warfare and the secular decline of the US economy. Both these interviews are a must watch. No wonder European leaders are ramping up their push for a new bond-rating agency.