Update: Greek Debt Crisis Shows Europe’s Clash of Cultures

Global stock markets sagged Wednesday, held back by a nagging crisis in Greece as concerns mount over debt loads across Europe.

Markets were looking for reassurance from a meeting Wednesday between German Chancellor Angela Merkel, International Monetary Fund chief Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet about whether Germany will live up to its pledge to bail out its European neighbour.

Mr. Strauss-Kahn said that every day lost in resolving Greece’s problems risks spreading the impact “far away”. Mr. 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.
Greece has said it can’t pay debts coming due May 19 without billions in bailout loans from the countries that use the euro, as well as the IMF. The IMF has pledged 10 billion euros in aid, but that is well short of the total 45-billion-euro ($60.2-billion Cdn) Greek debt load.

Germany, which would be the biggest single contributor to the bailout package, has delayed approving its eight-billion-euro share, calling for strict conditions and parliamentary approval that could take time.

That raised fears Greece might not get the money it needs to stave off collapse.

Last week, the yield on two-year Greek bonds sat at 10 per cent. That jumped to 16 per cent on Tuesday. On Wednesday, the bonds were trading hands with a 25 per cent yield, suggesting investors are quickly losing faith that Greece will ever be able to pay back its debts.

The catalyst appears to be Tuesday’s downgrade of Greek bonds to “junk” status by the Standard & Poor’s ratings agency. The agency also lowered Portugal’s credit-worthiness by two notches, stroking fears that Greece’s problems will spread to other countries with troubled finances such as Spain and Italy that are too large to be bailed out.

Late Wednesday morning, S & P did just that, moving Spain’s ratings down a notch to AA.

The agency said Spain’s growth prospects were weak after the collapse of a credit-fuelled housing and construction bubble.

Mr. 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.” (BBC)

The downgrade “has sent the bond markets into meltdown and equity investors toward the exits,” said Michael Hewson, an analyst with CMC Markets in London. (CBC)

Spain’s deputy prime minister, Maria Teresa de la Vega, appealed for market claim, telling reporters: “We have a very serious plan of… deficit reduction. We have adopted an austerity program. We are adopting all the measures needed to meet our commitments. So I want to send a message of confidence to the population and of calm to the markets,” she said. (BBC)

“This is like Ebola,” OECD secretary general Angel Gurria told Bloomberg on Wednesday regarding Europe’s debt contagion. “When you realize you have it, you have to cut your leg off in order to survive.”

Authorities in Athens halted short-selling of stocks for two months as the Athens stock exchange continued a six-day losing streak Wednesday. The ban on betting that shares will go down will remain in force until June 28.

Across europe, the FTSE 100 index of leading British shares fared comparatively well, moving up 13.18 points, or 0.2 per cent, to 5,616.7. Frankfurt’s DAX exchange lost 33.3 points, or 0.5 per cent, to 3,813.81.

In Lisbon, the PSI 20 index was up 0.8 per cent at 7,211.94 after earlier having dropped by as much as six per cent.

The euro hit a 12-month low on Wednesday, trading at $1.3134 US, down 0.0036 cents.

In North America, markets were essentially flat with the S&P/TSX Composite Index in Toronto down 68.2 points in 12.078.6. In New York, the Dow Jones Industrial Average was down 11.5 points to 10,980.

Many Germans oppose the Greek bailout. A poll by Dimap, for German newspaper Die Welt and French broadcaster France 24, showed that 57 per cent of Germans thought that aid was a bad decision while just 33 per cent favoured such a move. The survey was conducted earlier this month and surveyed 1,009 people. No margin of error was given.

Underscoring the German debate is an important election in Germany’s most populous state on May 9. Merkel is also coming under pressure from within her own party, the conservative Christian Democratic Union, over her handling of the Greek issue.

Finance Minister Wolfgang Schaeuble stressed an interview with the Handelsblatt daily that Germany is committed to helping Greece. “The German government is not riding the brakes,” Schaeuble said. “We are pushing for a quick decision.” (CBC)

A government spokesman, who refused to give his name because of the sensitivity of the issue, said the Finance Ministry had already prepared draft legislation for parliament to approve the loan guarantees – a critical and necessary step for the German contribution to go through.

“They apparently treated their capital like waste,” said Ilona Reichelt, a German retiree standing Wednesday near the Brandenburg gate, the Berlin landmark. “It’s not like they’ve suffered an earthquake or a natural disaster. It’s a man-made disaster.” (The Associated Press)

In trying to explain how Greeks think, some point to Zorba the Greek, the fictional, free-spirited figure of dance. He’s not the type to get his finances in order. “I wouldn’t say that all Greeks are Zorba, but part of every Greek is this love of life and this love of enjoyment,” said Nikos Dimou, a 75-year-old Greek author who studied in Germany and has been most industrious – producing 60 titles in all. “The Greeks have a rather negative view about the Germans because they work too much.” (The Associated Press)

Dimou attributes the differences between southern and northern Europe to the lack of a “Protestant work ethic” in the south – as well as the sun-splashed Mediterranean climate, which slows the pace and encourages corner-cutting. By contrast, Nordic countries have robust public finances, though Iceland’s economy spiral in 2008 puts the weather theory to the test. (The Associated Press)

In the meantime, stocks sagged and markets sold off Greek bonds with a vengeance. Investors appeared to anticipate Athens would eventually have to default or restructure its debt payments at some point even if the bailout gets it past May 19, when it has debt coming due.

A key indicator of risk – the interest rate gap, or spread between Greek 10-year bonds and the benchmark German equivalent – hit an astonishing 9.63 points, a massive jump from around 6.4 points on Tuesday.

It translates into borrowing costs at the moment of nearly 13 per cent for a 10-year bond, four times what Germany pays to borrow.

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