Credit default swaps and rising interest rates suggest Greece is in serious trouble in spite of the ECB’s futile attempts to downplay the situation. Please consider Greek Bonds Show Waning Faith It Can Avoid Bailout.

Greece is losing the confidence of bondholders that it will reduce the largest budget deficit in the European Union amid increased speculation that the country won’t be able to meet its debt obligations.

The nation’s government bonds are the world’s worst performers in January, losing 6 percent in local currency terms and extending their decline over the past three months to more than 11 percent, Bloomberg/EFFAS indexes show. Credit-default swaps tied to Greece trade at about the same levels as Dubai when it got a $10 billion bailout from Abu Dhabi in December. Greek 10-year bonds rebounded today after EU Monetary Affairs Commissioner Joaquin Almunia said the country won’t default.

Investor concern that Greece can’t tackle its budget deficit is hurting the debt of national utility companies and banks, said Philip Gisdakis, head of credit strategy at UniCredit SpA in Munich.

“If you fear a Greek crisis then you should not only avoid government bonds but corporates as well,” Gisdakis said. “And if you fear Greece, you should also fear Portugal and Spain.”

EU policy makers have no “plan B” to help Greece, Almunia said today.

“There is no bailout problem,” the bloc’s top economic official said in an interview with Bloomberg Television at the World Economic Forum’s annual meeting in Davos, Switzerland. “Greece will not default. In the euro area, default does not exist.”

What’s Plan A?

Pardon me for asking but precisely what is “Plan A” if interest rates in Greece soar out of control?

Can there be a “Plan C” even if there is no “Plan B”? Are there any plans at all?

While pondering those questions, please consider Deteriorating Greece Situation Could Force EU’s Hand.

European Union officials insist there won’t be a bailout for Greece, but if the country’s borrowing costs continue to climb, the bloc will have to do something to stave off default.

Such a bailout would be unprecedented for a euro-zone country, but would nonetheless be feasible. When Greece’s borrowing costs soared last spring, the German finance minister at the time, Peer Steinbrueck, said Germany would have to offer financial help if another euro-zone state faced serious trouble.

European Commissioner for Economic and Monetary Affairs Joaquin Almunia, around the same time, said “there is a plan” for such situations, but never provided details.

EU officials in Brussels stress that any bailout might encourage “moral hazard,” allowing yet another Greek government to skirt much-needed reforms.

The bloc’s finance ministers and bureaucrats justifiably feel duped. Greece is a serial budget offender and revisions to a decade’s worth of data suggest the country shouldn’t have been allowed to enter the euro zone in 2001.

“I think the Greeks are very much aware of how serious the situation is and I think they are aware that they need to solve their problems themselves,” Dutch Finance Minister Wouter Bos told journalists before a meeting of euro-zone finance ministers on Jan. 18.

There are questions about whether Greece will ask the International Monetary Fund for help. Two EU diplomats say the European Commission wants to avoid such a situation, which might be seen as an embarrassing sign of weakness for the bloc’s institutions, including the Eurosystem, the grouping of the European Central Bank and the central banks of all the euro-zone nations.

The Greek government repeatedly has denied it is in bailout talks with the IMF, the commission or individual EU countries. France and Germany on Thursday rejected a report that they are discussing contingency plans for Greece.

Plan Facts

Almunia: “There is a plan” but there are no details.
Almunia: There is no “Plan B”
Almunia: “There is no bailout problem. In the euro area, default does not exist.”
Greece: IMF bailout plans denied
France and Germany: Reject reports of contingency plans

Contagion Fears

Now that we fully understand the plan, please consider Greece, others, move to quash rumors about bailout.

Greek and European officials moved Friday to quash market buzz that Athens could find itself in too deep a financial hole to save itself, potentially saddling European governments with a costly bailout.

Prime Minister George Papandreou and the EU denied reports that European governments had engaged in bailout discussions, stressing that Greece itself must carry through on its plans to cut an alarming deficit.

“Any discussion of a ‘Plan B’ is simply not in our vocabulary,” said Greek Finance Minister George Papaconstantinou at the World Economic Forum in Davos, Switzerland, where he and Papandreou have been giving assurances of their determination to carry through on a difficult plan to get spending under control in the next several years.

European Union officials in public are offering only tough love, stressing that Greece must fix its problems, although economists tend to think that if a bailout were needed it would be forthcoming.

“There’s no bailout. There’s no way out,” French Finance Minister Christine Lagarde said, after a closed-door meeting with European Commissioner Joaquin Almunia and European Central Bank President Jean-Claude Trichet.

Almunia said that Greece had presented a program to rectify the imbalances and called it a “very ambitious” program.

“We are preparing recommendations to help the Greek authorities to implement 100 percent of this program,” he said, adding the country would have EU support and faced no risk of being booted from the euro zone.

Dominique Strauss-Kahn, chief of the International Monetary Fund, said Greece has much to do but that institution was ready to intervene, if asked.

“The country is in a difficult situation. The European authorities, including those in Brussels and at the European Central Bank, are working on it,” he said. “We at the IMF are ready to intervene if asked, but that is not a forgone conclusion and I think that inside the euro zone, there will be enough solidarity to deal with it.”

Though, talk of a bailout has been dismissed, the idea continues to gain increasing traction in the markets.

“I believe Greece will be bailed out if necessary because the implications of not doing so are hard to imagine,” said Kit Juckes, chief economist at ECU Group.

It’s not just Greece facing the skeptical eye of the markets.

“If fears of contagion become widespread, risk-averse investors could start to gun for even the larger or ‘stronger’ euro zone economies and their debt,” said Geoffrey Yu, a currency strategist at UBS.

“Spain, Italy, Austria and Belgium — together accounting for more than 35 percent of the euro zone economy versus just over 6 percent for Greece, Portugal and Ireland combined — may then be next in the firing line,” he added.

More Plan Facts

Papaconstantinou: ‘Plan B’ is simply not in our vocabulary
Jean-Claude Trichet: “There’s no bailout. There’s no way out”
IMF: Ready and willing to assist if asked

I am sure that further clarifies the situation for everyone.

Euro Tumbles

Please consider Euro Posts Biggest Monthly Decline in Year on Greece’s Turmoil

The euro recorded its biggest monthly drop in a year against the yen and fell versus the dollar as concern Greece won’t be able to meet its debt obligations spurred a retreat from riskier assets.

Credit-default swaps insuring Greece’s debt reached a record high of 422.5 basis points on Jan. 28, CMA DataVision prices show.

“If fears of contagion become widespread, risk-averse investors could start to gun for even the larger or stronger euro-zone economies and their debt,” Geoffrey Yu, a currency strategist in London at UBS AG, wrote in a note to clients.

Spain Has A Plan

Inquiring minds are please to hear Spain to Announce Deficit Cut Plan, Seeking to Avoid Greek Fate.

Spanish Finance Minister Elena Salgado presents her plan for slashing the budget deficit by two thirds today, seeking to avoid the punishment investors have meted out to Greece. The Cabinet will discuss spending cuts of as much as 50 billion euros ($70 billion) by 2013 today in Madrid as well as a proposal to tighten pension rules, said an official at the prime minister’s office who declined to be named in line with policy.

To shore up public finances and convince investors it was serious about its deficit pledges, the government raised taxes on income from savings and announced an increase in value-added tax to take effect July 2010.

Spain, heading for a second year of economic contraction, is under scrutiny amid investor concern that it will struggle to pay its debts, like Greece, which has a deficit of 12.7 percent of gross domestic product. Though Spain’s debt is about half of Greece’s, New York University Professor Nouriel Roubini said on Jan. 26 that in some ways the country has “even bigger problems” and poses a larger threat to European monetary union.

The euro has declined to a six-month low, sliding yesterday to $1.3939. The extra interest investors demand to hold Spanish debt rather than German equivalents stood at 99 basis points yesterday, five times the level at the start of 2008. The extra yield that investors demand to hold Greek 10-year securities widened to 395 basis points, the most in more than a decade.

Spain’s budget deficit probably amounted to 11.2 percent of GDP last year, according to the European Commission, which has set a 2013 deadline to cut the shortfall to 3 percent. Its debt is set to double from before the financial crisis.

Portugal Disappoints

Portugal disappointed investors and credit-rating companies with the budget it presented to parliament on Jan. 26. Moody’s Investors Service said the “limited deficit reduction this year means that more ambitious cuts will be needed in 2011-2013” and that its current Aa2 credit rating could be at risk.

“With the discussion on the desolate state of Greece’s public finances, public awareness of these problems has at last risen,” Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt, wrote in a note. “Along with Italy and Portugal, Spain is now regarded as another candidate for a serious crisis.”

Unlike Greece, Portugal, and Italy, Spain appears to have some semblance of a plan. However, that does not mean Spain will actually carry it out. As for Greece, I smell an IMF bailout or an emergency “Plan B” meeting coming soon given the credit markets do not seem to have much faith in “Plan A”, whatever it is.

Mike “Mish” Shedlock
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