Greek economy in trouble

SUBHEAD: Significantly, the cost to insure Greek bonds against default has risen above Vietnam and Hungary. Image above: Greek food pushcart in New York City financial district. From http://www.kapshow.com/pushcartnyc/archives/financial_district/index.html By David Oakley on 10 December 2009 in London Financial Times - (http://www.ft.com/cms/s/0/94e95c5c-e5cb-11de-b5d7-00144feab49a.html)

Greece’s bond markets have this week seen the most spectacular collapse in the history of the eurozone as investors have decided the country’s public finances may be beyond repair.

It is a warning to other governments as the fall in the Greek bond markets could be repeated in other eurozone and developed economies unless record debt levels are reduced.

Greek government two-year bond yields, which have an inverse relationship with prices, have risen 1.3 percentage points this week, an unprecedented move that highlights the shattered confidence of investors in the Greek economy.

Huw Worthington, fixed income strategist at Barclays Capital, said:

“Greece is now clearly the worst performing economy, but other countries have to show they can deal with their debt problems or there could be a sell-off in their bond markets too.”

The bond markets of Ireland, Spain and Portugal have come under pressure this week as these economies are considered vulnerable by investors.

The bond markets of Italy, which has been the weak link of the eurozone in the past, have been stable this week because the country’s key economic indicators have been improving.

Steven Major, head of fixed income research at HSBC, said:

“Investors have become more discerning. They are selling bonds of those countries they think are the most vulnerable. This is a contrast to the height of the financial crisis, when they sold everything except German bonds and US Treasuries.”

Critically, the euro has been relatively stable this week. This suggests that investors are not worried about the break-up of the single currency or about the exit of Greece from the monetary union.

In short, Greece has become the pariah of the eurozone for investors as all the key economic statistics point to an economy that is close to implosion. Its debt to gross domestic product will become the highest in the eurozone next year at 123 per cent, according to Barclays Capital, while its budget deficit is forecast to rise to 12.7 per cent in 2010, also the highest in the eurozone.

Significantly, the cost to insure Greek bonds against default has risen above Vietnam and Hungary. The latter is an emerging market economy that was forced to turn to the International Monetary Fund for financial support earlier this year, in a sign of the weakening confidence in Budapest’s ability to tackle its growing debt mountain.

However, Greece is a stark warning to other developed economies such as Ireland, Spain, Portugal and even the UK, analysts say.

“Unless governments reduce their debt and budget deficits, then they could see sell-offs like Greece. Investors want debt levels reduced, and they want it now,” Mr Worthington said.

Video: Street riots continue in Athens http://www.guardian.co.uk/world/video/2009/dec/07/greek-riots-students-police-athens