THE EURO ZONE crisis deepened yesterday as Greek economic reform plans were delayed, sparking tension in the financial markets over the country’s ability to rein back its mounting public debt.
The euro dropped against the dollar, Greek bond yields rose to euro-era highs and fears of contagion to Spain, the key economy, increased amid worries that Athens’s determination to implement its recovery plan was waning.
Fitch, the rating agency, also hit Greece with a multi-notch credit downgrade, warning that the country faced big challenges in turning round its reversing economy.
Harvinder Sian, euro rates strategist at RBC, said: “The Greek crisis has ratcheted up this week because policymakers and central bankers cannot decide the way forward.”
Gary Jenkins, head of fixed income at Evolution Securities, added: “It is a mess. Division among the politicians and central bankers is not helping. The problems in Greece could spread to the larger economies.”
There is confusion over whether Greece will see a swift restructuring of its debt, a course some euro zone policymakers have backed but which the European Central Bank said would spark a banking crisis in Athens.
The country missed its deadline yesterday for presenting a reform plan to parliament for approval following demands by its European partners and the International Monetary Fund for bolder spending cuts and a timetable for planned privatisations.
Euro zone politicians were also warned that even a so-called soft restructuring of Greek debt would lead to the ECB cutting off Greece’s banks from its liquidity, with possibly catastrophic consequences.
Jens Weidmann, Germany’s new Bundesbank president and ECB governing council member, said extending bond maturities in a soft restructuring “would make it impossible to accept them as collateral for refinancing operations under existing rules”.
He added: “Consequently large parts of the Greek financial sector would be cut off from funding.”
Experts from the European Commission, the IMF and ECB have not yet set a new deadline for signing off the revamped Greek reform plans – the first step in a round of endorsements.
According to some estimates, it could be another 10 days before the Greek finance ministry discusses the plan with the EU-IMF team. That could cause further market uncertainty.
Spanish regional elections this weekend also created a stir in the markets amid worries that more details might emerge over the amount of debt building up in the country’s municipalities.
Fitch cut Athens’s ratings by three notches to B plus, which is four notches below investment grade, and placed the country on rating watch negative. – (Copyright The Financial Times Limited 2011)
