icon bookmark-bicon bookmarkicon cameraicon checkicon chevron downicon chevron lefticon chevron righticon chevron upicon closeicon v-compressicon downloadicon editicon v-expandicon fbicon fileicon filtericon flag ruicon full chevron downicon full chevron lefticon full chevron righticon full chevron upicon gpicon insicon mailicon moveicon-musicicon mutedicon nomutedicon okicon v-pauseicon v-playicon searchicon shareicon sign inicon sign upicon stepbackicon stepforicon swipe downicon tagicon tagsicon tgicon trashicon twicon vkicon yticon wticon fm
29 Apr, 2010 07:02

Debt contagion fears mount for Eurozone

European financial leaders are facing renewed concerns about burgeoning member nation debts, with Greek debts being estimated as high as 120 billion euro over three years.

Spain is now the latest country to have its debt downgraded by ratings agency Standard and Poor's. It said the nation's growth prospects are weak after the collapse of a credit-fuelled housing and construction bubble.

The news sent the euro to a fresh year low against the dollar – and is causing greater fears among investors. Sam Stovall, Chief Financial Analyst at S&P says this represents a larger concern for the EU than the Greek debts crisis.

“Spain is a bigger concern for most investors because Spain represents 8.5 percent of the EU GDP as of 2009, where as Greece represented less than 2 percent, Portugal represented less than 1.5 percent. So a fairly large country like Spain having some concerns, I think that now in a sense we're moving from the minor leagues up to the major leagues."

The news of Spain's downgraded credit rating has sent further contagion fears throughout Europe. Coming in the wake of a continued imbroglio about how to respond to Greece’s debts, with Portuguese debts costs also spiking.

The fear of contagion has become real for the markets. It might be possible to bailout one crippled economy, but a handful would be a different matter altogether. Portugal, Spain, Ireland and Italy all have similar problems to Greece. And the worry is that if one falls, all may fall, according to Francis Lun, General Manager at Fulbright Securities LT.

“Later this week I think it will continue to fall, I think we will continue to have bad news from Europe, after Greece then Portugal then Spain, I think it's like a domino effect, the house of cards is falling apart, and it will bring down the global financial markets too.”

Officials are doing their best to maintain confidence. The European Commission says it has full confidence Greece will bring its spending under control and start to pay off debt. However, it stresses that a debt restructuring is not on the cards and any funds provided would be in the form of loans and not grants. Tom Mundy, equity strategist at Renaissance Capital says the credibility of the Eurozone is at stake, with major potential implications for Russia.

“If they have to write down those debt positions, not just for Greece, but for these other heavily-indebted Europe-zone countries that could have very serious implications for the health of the European banking system, and not just the credibility of the European Union, and that could very easily filter into Russia, so the implications are very significant.”

That's despite the fact the economy here is quite unlike the troubled European ones. Russia is barely leveraged and it still has around $440 billion in reserves, with spending being reigned in after major outlays to ward off the economic downturn of 2009. Sergey Guriev, head of the New economic School, says increased volatility globally will hit emerging markets harder, but adds that the recent Russian sovereign bond issue points to greater confidence in Russia’s finances.

“Of course emerging markets are risky investments and whatever volatility happens in the global market hits emerging markets. In terms of sovereign debt Russia is actually a very good bet, and we just saw that when Russia placed its eurobonds at just 100 basis points spread. Of course emerging markets are risky investments and whatever volatility happens in the global market hits emerging markets.”

After weeks of uncertainty surrounding Greece, leaders in Europe are getting a sense of urgency. The German Chancellor, who is being asked to provide the biggest share of a rescue package, wants the whole process to be accelerated, echoing the sentiments of Dominique Strauss Kahn the boss of the IMF, who warns that time is of the essence. But the question is will they be able to intervene in time to prevent the Eurozone's economic house of cards from collapsing.