THE EURO dropped to its lowest level against the US dollar for more than a year as a coalition of global banks issued a warning about the fragility of the situation in Greece.
As talks continue on a second Greek bailout, the Institute of International Finance (IIF) banking lobby said the wider debt crisis remained as “intractable as ever” and warned that other weakened countries were vulnerable to any disorderly default by Athens.
The IIF – which draws its directors from Deutsche Bank, Commerzbank, Goldman Sachs, UBS, HSBC and Morgan Stanley – is a powerful voice in the debate on Europe’s debt emergency. It represents private investors in the negotiation of the new Greek package.
A deal to impose a loss of 50 per cent on the country’s bonds is expected before the end of this month, but the IIF said it was likely that Greece’s financing needs in the next three years will be greater than forecast due to its worsening economic position.
“Given the reform fatigue evident in Greek society, it is not clear that harsher adjustment measures can be implemented,” it said. “It is therefore likely that the financing needs of Greece will be much larger than envisaged, putting pressure on official and private sector creditors to somehow fill the gap.
“If a voluntary approach to restructuring Greek sovereign debt cannot be implemented and Greece enters into a disorderly default, the consequences for other countries facing sovereign debt problems would be quite negative.”
As talks resume on a new international treaty to fortify the single currency, the IIF said the decisions taken at an EU summit last month were “insufficient to provide a comprehensive solution” to the crisis.
“The summit’s key achievement – a fiscal compact – is seen as relying too much on fiscal discipline and austerity, which may be necessary in some cases, but if applied across the board would accentuate the faltering economic activity expected for this year.”
European officials and diplomats gather in Brussels today for further discussions on the new treaty, which may yet lead to a new European referendum in Ireland.
The talks come a day after the euro slipped to a new 15-month low against the dollar, which was helped by new US data pointing to higher-than-expected job creation and a quicker expansion in the services sector.
Further pressure was evident in Europe as Italian bank UniCredit fell a further 17.3 per cent on top of a 14.5 per cent slide on Wednesday, when it disclosed a massive discount on a rights issue.
Amid anxiety that other banks might have to follow suit to meet political demands to shore up their balance sheets, shares in the Europe 600 euro zone banking index dropped almost 6 per cent.
Although the EFSF rescue fund successfully tapped markets for a further €3 billion for the Irish and Portuguese bailouts, the level of demand seen yesterday was weaker than in previous sales.
The three-year bonds, which provide about one-eighth of the Irish and Portuguese funding requirements this year, were the first issued with that maturity by the EFSF and carried an annual interest rate of some 1.77 per cent.
They met demand for €4.5 billion from investors, 83.5 per cent of them in Europe. The fund’s first auction one year ago was oversubscribed nine times.
France raised €7.96 billion of bonds its in first auction of the year, which was twice oversubscribed. The country paid a slightly higher yield on its 10- and 30- year paper, but the interest rate was within the projected range.
Sales by Italy and Spain next week are seen as the first major market test this year for the two countries, which are struggling to maintain investor support.
