The head of the International Monetary Fund has warned that the crisis in Greece could spread throughout Europe. Dominique Strauss-Kahn said that every day lost in resolving Greece's problems risks spreading the impact “far away”.
World financial markets, recovering slightly on Wednesday, have been badly hit by fears of contagion from Greece. Strauss-Kahn was speaking at a news conference in Berlin after trying to persuade reluctant German politicians to back the terms of a rescue deal.
But even as politicians were trying to resolve the crisis, Europe's debt problems were flaring elsewhere. Standard & Poor's ratings agency delivered more bad news by cutting Spain's rating to AA from AA+. The agency said Spain's growth prospects were weak after the collapse of a credit-fuelled housing and construction bubble.
Strauss-Kahn's comments foreshadowed S&P's news. What is at stake today is the economic situation of Greece. But it's more than that [...] We also need to restore confidence [...] I'm confident that the problem will be fixed. But if we don't fix it in Greece, it may have a lot of consequences on the European Union, Strauss-Kahn said.
The IMF chief and ECB president Jean-Claude Trichet, were in Berlin to urge German MPs to agree to a rescue deal under which Greece would get billions of euros in loans. German Chancellor Angela Merkel said that talks on the bail-out package must be sped up. It is perfectly clear that the negotiations with the Greek government, the European Commission and the IMF need to be accelerated, she said after meeting Strauss-Kahn. We hope they can be wrapped up in the coming days, added Merkel.
But many German politicians are opposed to the bailout of Greece, and Mrs. Merkel has herself been accused of offering only qualified support. Germany is facing elections, and with public opinion against giving billions of Euros to Greece, Mrs. Merkel must tread a fine line.
As Europe's largest economy, Germany would provide the biggest single loan to Greece among the Eurozone nations. The aid package being offered by the EU and IMF is currently 45 billion Euros. But support for the bailout in Germany will not be helped by claims that the total cost of the proposed package could be up to 120 billion Euros over three years.
After meeting Strauss-Kahn on Wednesday, the leader of Germany's Green Party, Juergen Trittin, said the aid could total between 100bn and 120bn Euros. Financial markets continued to be hit, following credit rating agency Standard and Poor's downgrade of Greek debt to junk on Tuesday. This means the rating agency views Greece as a much riskier place to invest, and increases the interest rate investors will charge the Greek government to borrow much-needed money on the open market.
On Wednesday, that interest rate hit 11.3% for 10 year Greek bonds—another all-time high for a Eurozone country. Interest rates on two-year bonds hit a new high of almost 19%, later falling back to 16%. The euro hit a one-year low against the dollar of 1.3146.
European stocks also fell sharply on Wednesday, although they recovered some of their losses in afternoon trading. Overnight Japan's leading share index, the Nikkei 225, closed down more than 2.5%. The turmoil forced Greece's stock market regulators to impose a ban on short-selling, amid concerns that bank shares are being undermined by speculators.
Concerns about the Spanish and Portuguese economies also intensified. Yields on Spanish 10-year bonds reached their highest level (4.27%) since the Euro was launched. And investors are demanding an interest rate of close to 6% from Portugal.
If yields rise much further Portugal may, like Greece, be in a position where [borrowing] on the open market becomes just too expensive, warned Jane Foley, research director at currency trader Forex.com.
Portugal's Prime Minister José Socrates spoke of a speculative attack on the Euro and Portuguese debt. He said he would work with the opposition party to restore economic confidence in the country which also had its credit rating downgraded on Tuesday. According to Simon Derrick, from Bank of New York Mellon, time is now running out for Greece to secure a deal. The Greeks need to accept the pain that is the inevitable and foreseeable consequence.
The message that has been emerging from the markets this week is that a resolution to the Greek crisis needs to be found in the next few days, he said, warning that delays risk sparking contagion through southern Europe. Greece needs to secure at least some funding by mid-May, when it is due to repay investors about 8.5 billion Euros of debt.
There is significant opposition to the handling of the crisis in Greece itself, with some demonstrators calling for the country to default on its debts so that foreign banks would pay the price for the crisis.