YIORGOS KARAHALIS
Thursday's plunge in Greek asset prices suggests Athens may soon be forced to seek emergency aid from European governments - and disagreement over how a rescue would be structured could damage markets further.
Greek bond prices and bank stocks, which have been sliding for months amid concerns over how Greece will bring its crushing debt burden under control, tumbled at rates that indicated market confidence was close to running out.
The spread of 10-year Greek government bonds over German Bunds widened more than 40 basis points to 461 basis points, while the drop in Greek bank stocks brought their losses over the past three days to nearly 14 per cent.
Two-year Greek bond yields jumped to almost 8 per cent, up 121 basis points, their biggest one-day jump on record. Rises of this size, and an extreme scarcity of buyers in the market, indicate Greece might have trouble selling new debt even if it offered yields far above latest market levels.
Before Thursday, Greek officials had already said bond yields were too high for them to continue refinancing their debt at such levels over the long term, because of the increased interest costs.
Now the chance that the crunch could come sooner rather than later.
Greece might conceivably be unable to issue enough bonds to meet funding needs in May. It needs to refinance €8.5-billion of debt maturing on May 19.
It could probably get over the refunding hump by issuing Treasury bills, which would appear safer to investors because they would be short-term. But repeatedly rolling over T-bills could create fresh problems in the form of a closely spaced series of refunding humps in the future.
This means Greece may have no choice but to try to use an unprecedented financial safety net announced last month by European governments. The scheme would provide coordinated bilateral loans, complemented by aid from the International Monetary Fund, if Athens became unable to borrow from markets.
But deep divisions between governments over how to handle Greece, which delayed the announcement of the safety net for weeks, show no sign of being resolved, and key details of how the net would be deployed have not yet been agreed.
So even if Greece applies for aid, disbursement could be delayed for a dangerously long period, and the amount of money released could be less than what is needed to ease markets' fears decisively.
Under a deal brokered by Germany and France, a unanimous euro zone decision would be required to trigger a rescue; with its domestic public opinion strongly against helping Greece, Germany appears unlikely to agree to a rescue quickly.
A euro zone source told Reuters Wednesday that euro zone governments were still split over the rate of interest that Greece would be charged, with Germany and the Netherlands calling for higher rates to deter countries from fiscal indiscipline.
Germany showed no sign Thursday of moderating its position on Greece in response to the market turmoil; a spokesman said "the government's position remains unchanged" since last month's deal on the safety net.
Comments by Greek officials suggested they were no closer to resolving their dilemma. A Greek government official insisted Athens did not need to activate the safety net, but also that the country was making every effort not to borrow at "barbaric" market interest rates.
The IMF has still said almost nothing about how it would manage the politically and technically difficult task of cooperating with euro zone governments to aid Greece, apparently because those issues are seen as too sensitive to discuss publicly.
The European Central Bank, which was sceptical of the IMF's involvement before the safety net was announced, also appears to be shying away from politically sensitive decisions.
On Thursday the ECB, which has agreed to extend easy collateral rules for holders of Greek and other lower-rated bonds into 2011, said it would adopt a sliding scale of risk premiums, or "haircuts," for such bonds.
The haircuts may increase pressure on Greek banks by effectively cutting the value of the collateral from next year. The ECB did not announce details of the new scale on Thursday but said it would be published in July.
If the safety net is eventually activated for Greece, the markets are likely to remain concerned about its continued functioning over the long term.
Many analysts estimate Greece could need emergency loans totalling around €20-billion to €50-billion over several years to help it over the crisis. During this period, markets might worry about Greece's ability to meet tough fiscal conditions attached to the loans, and about the political will in Germany to continue supporting Greece.
If Greece decides it is too difficult or expensive to use the European safety net, it may turn to the IMF alone for help.
This could be equally nerve-racking for the markets because it would suggest the euro zone was unable to rescue one of its members, and since a number of IMF aid packages for countries in the past have been associated with sovereign debt rescheduling and restructuring.