Thursday, February 25, 2010

Greece News Update: Euro Tumbles on Concerns About Worsening Economic Crisis

Euro Tumbles on Greece Concerns, Jobless Data

Wall Street

NEW YORK -- Revived concerns over Greece's sovereign debt and disappointing U.S. economic data sent the euro tumbling Thursday morning, sinking to a year low against the yen, as investors fled riskier assets to seek safety in the dollar and the Japanese currency.

The euro also slumped against the dollar, falling below the key $1.35 level, in a selloff exacerbated after Moody's Investors Service said Thursday that Greece's A2 debt rating may be cut if the Greek government doesn't act forcefully to cut its ballooning deficit. That threat follows a similar warning by Standard & Poor's, which ranks Greece's sovereign debt at BBB+, that the country's credit quality may be lowered to junk status.

Demand for the dollar and yen surged in the wake of worse-than-expected U.S. weekly jobless-claims data, fueling concerns about the pace of economic recovery. The euro hit an intraday low against the yen after the data, falling more than 1.5% and falling to 119.84 yen, the lowest level since Feb. 23, 2009.

"The jobless claims data undermines recent optimism regarding an accelerating U.S. recovery," said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington. "Risk aversion is the primary theme of the market and [the jobless claims data] add to the already negative sentiment in the financial markets ... by news of another possible downgrade of Greece's debt ratings."

In recent trade, the euro was at $1.3483 from $1.3534 late Wednesday. The dollar was at 89.12 yen from 90.19 yen, while the euro was at 120.20 yen from 121.95 yen. The U.K. pound was at $1.5257 from $1.5396. The dollar was at 1.0851 Swiss francs from 1.0810 francs.

The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 81.034 from 80.847.

Investor sentiment further deteriorated overnight when Moody's warned Greek authorities that if the country doesn't stick to its austerity plan, its credit ratings will be cut, with the magnitude of the downgrade depending on how much the government deviates from the plan, Moody's told Reuters.

Write to Fabio Alves at

Strike-hit Greece faces EU budget test

February 26, 2010 - 12:24AM

European Union and IMF experts on Thursday were finalising a report on Greece's crisis-hit finances as the embattled Socialist government digested the impact of a general strike against its austerity cuts.

Tens of thousands of people took to the streets of major Greek cities on Wednesday to protest tax hikes and benefit cuts in the first general strike to hit the government, which is grappling with spiralling debt levels.

But the main question according to analysts is whether the majority of Greeks, who currently appear to accept the painful adjustment, will continue to support extra measures that are widely perceived to be imposed from Brussels.

"The real question is whether the pro-European spirit of Greeks will falter before the flurry of orders from Brussels," said Thomas Gerakis, head of the Marc polling company.

For the moment, "Greeks remain convinced that the situation is very difficult. They got up from their armchairs and realised that they are on the deck of a sinking ship," he told AFP.

As the country with the highest public deficit in the eurozone, Greece is at the centre of a storm over spiralling debt levels in Europe that has threatened cohesion in the European single currency area. IMF stresses deficit reduction in exit strategies

After a collapse in investor confidence, Greece faces major strains in raising new money on international markets and is under intense pressure from EU authorities to get its public finances back in order.

The report of the three-man mission from the EU, European Central Bank and International Monetary Fund mission, which completed on Wednesday a round of talks with Greek officials, comes as a new hurdle for Athens.

If the experts say the programme is not enough, a meeting of EU finance ministers could demand even harsher corrective action at a meeting on March 16.

Before that meeting, the EU Financial Affairs Commissioner Olli Rehn is also due to visit Athens. EU budget enforcer to go to Greece

The experts met Finance Minister George Papaconstantinou and Economy Minister Louka Katselli just as the country was hit by a nationwide strike, including a strike by journalists, against austerity measures.

Also late on Wednesday, Standard & Poor's credit rating agency warned that it could downgrade Greek sovereign debt again within a month.

The yield on Greek ten-year bonds on Thursday rose to 6.598 percent compared to 6.496 percent a day previously.

Under pressure from financial markets and EU institutions and partners, Greece has promised a programme to cut public spending and crimp public sector pay, to raise taxes and fight tax evasion, and to restructure its economy.

The baseline target is to cut back an annual public deficit by four percentage points of gross domestic product to 8.7 percent this year.

This is widely considered to be an enormous undertaking particularly since credit rating agency Moody's has calculated that Greece will have to use 15.1 percent of its tax revenues this year to meet debt interest payments due.

That is about twice the ratio in other debt-stricken eurozone countries Spain and Portugal.

The last EU summit on February 11 decided to send three-way EU, ECB and IMF missions to Athens regularly under a special arrangement of exceptionally close supervision of Greek public finances.

February 25, 2010

Banks Bet Greece Defaults on Debt They Helped Hide

New York Times

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.

A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.

On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.

“This is a country that is issuing paper into a weakening market,” said Ashish Shah, co-head of credit strategy at Barclays Capital, referring to Greece’s need for continual borrowing.

But while some European leaders have blamed financial speculators in general for worsening the crisis, the French finance minister, Christine Lagarde, last week singled out credit-default swaps. Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.

Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.

On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.

“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”

The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and covers other troubled economies like Portugal and Spain. And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.

In February, demand for such index contracts hit $109.3 billion, up from $52.9 billion in January. Markit collects a flat fee by licensing brokers to trade the index.

European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.

That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure stands at $43.2 billion.

Trading in credit-default swaps linked only to Greek debt has also surged, but is still smaller than the country’s actual debt load of $300 billion. The overall amount of insurance on Greek debt hit $85 billion in February, up from $38 billion a year ago, according to the Depository Trust and Clearing Corporation, which tracks swaps trading.

Markit says its index is a tool for traders, rather than a market driver.

In a statement, Markit said its index was started to satisfy market demand, and had improved the ability of traders to hedge their risks. The index and similar products, it added, actually make it easier for buyers and sellers to gauge prices for instruments that are traded among players over the counter, rather than on exchanges.

“These indices have helped bring transparency to the sovereign C.D.S. market,” Markit said. “Prior to their creation, there was no established benchmark index enabling investors to track the performance of segments of the sovereign C.D.S. market.”

Some money managers say trading in Greek swaps alone, not the broader index, is the problem.

“It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at Amundi Asset Management in London, which has $40 billion in global fixed-income assets. “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds.”

If that sounds familiar, it should. Critics of these instruments contend swaps contributed to the fall of Lehman Brothers. But until recently, there was little demand for insurance on government debt. The possibility that a developed country could default on its obligations seemed remote.

As a result, many foreign banks that held Greek bonds or entered into other financial transactions with the government did not hedge against the risk of a default. Now, they are scrambling for insurance.

“Greece is not a small country,” said Mr. Raynes, at R&R in New York. “Credit-default swaps give the illusion of safety but actually increase systemic risk.”

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