A falling euro says the crisis in Europe isn’t over

Watch the euro.

Yesterday while stocks in Europe and around the world rallied in relief on news of a $146 billion bailout for Greece, a falling euro signaled continued skepticism that the crisis was over.

That skepticism seems to be on the rise this morning. As of 9:00 a.m. in New York the euro had fallen $1.3064 against the U.S. dollar. That’s down from $1.3207 in New York yesterday and marks the lowest price for the euro in more than a year.

The decision by the European Central Bank to continue to accept Greek government bonds as collateral for bank loans even though they are now rated below investment grade—or more popularly called junk—seems to be weighing particularly heavily on the currency markets. Read more

Greek crisis postponed, it’s time for the Spanish crisis to move front and center

Assuming that the $146 billion bailout of Greece goes ahead as planned, investors can forget about a Greek crisis for about three years.

And start to focus on Spain. The debt problem there looks like it’s developing along exactly the same path as the Greek debt crisis. I’d call the current stage denial of the size of the problem: On Friday Spanish finance minister Elena Salgado announced a new austerity plan that would save $21 million a year by cutting 32 senior jobs in government and eliminating 29 public agencies. Not exactly impressive for a government facing a $140 billion annual deficit. (Spain’s economy is about one-tenth the size of the U.S. economy so that deficit is equal to about $1 trillion in U.S. terms.)

It’s by no means certain that the bailout plan agreed to by European Union leaders over the weekend will go through. The biggest source of uncertainty, as it has been through the crisis, is Germany. It looks like Angela Merkel’s government has the votes to get the plan through the German parliament but the measure faces a constitutional challenge in the country’s supreme court, and there is a possibility, albeit small, that the court could stay Germany’s contribution to the bailout, until it rules on the issue. It’s doubtful that the court would decide to throw the European Union into crisis—the Supreme Court follows the election results, as Finley Peter Dunne’s Mr. Dooley commented about the U.S. court more than a century ago, so let’s assume the deal goes through.

Then what? Read more

How much could it cost to bailout Greece, Portugal, and Spain? Would you believe $630 billion?

Economists and investment banks are starting to put some concrete numbers on the Greek—and Spanish and Portuguese—debt crisis. And they’re large. To me shockingly large.

Kenneth Rogoff, a former economist for the IMF (International Monetary Fund) turned Harvard University economics professor—and whose book, This Time Is Different, co-authored with University of Maryland economist Carmen Reinhart, is a great source on the consequences of runaway national debt that I’ve used repeatedly on JubakPicks.com—told the New York Times that the IMF alone would need to commit $200 billion to bailing out Greece, Spain, and Portugal.

So far the IMF has pledged $15 billion to the initial $60 billion IMF/European Union bailout plan for Greece. That’s likely to get kicked up to $25 billion as a result of current talks with European Union governments.

But unfortunately that $200 billion is only a partial bill, just the cost to the IMF, for this crisis. Read more

Greek bonds get junk rating from S&P

You know that your country is in trouble when investors want 15% to buy your bonds.

If you still needed confirmation of the depth of the Greek debt crisis, today Standard & Poor’s lowered its long- and short-term rating on Greek government debt to BB+ and B, respectively. BBB- is Standard & Poor’s lowest investment grade rating. BB+ is its top “speculative” rating.

In other words Greek government bonds are now junk bonds.

Before this downgrade Standard and Poor’s had rated the country’s bonds BBB+ and A-2 for the long-term and in the short-term.

 “Medium-term financing risks related to the government’s high debt burden are growing, despite the government’s already sizable fiscal consolidation plans,” S&P said today. “Our updated assumptions about Greece’s economic and fiscal prospects lead us to conclude that the sovereign’s creditworthiness is no longer compatible with an investment-grade rating.”

And worse is yet to come, according to S&P, which said that the outlook for Greek debt is negative. Read more

How bad is the Greek crisis? 14% bad

The yield on 10-year Greek government bonds briefly hit 14% yesterday, April 26, before finishing at just 13.52%. That was an increase of 3.4 percentage points on the day. (Just for reference the total yield on 10-year U.S. Treasuries is 3.75%.)

So much for the European Union/IMF (International Monetary Fund) rescue plan. Investors see squabbling politicians and doubt that the plan will save Greece from default. (For more on how the European Union has let politics defer a solution see my post http://jubakpicks.com/2010/04/26/politicians-in-germany-do-their-best-to-make-the-greek-crisis-worse-and-it-looks-like-theyre-succeeding/ )

The rout in Greek bonds has spilled over into the market for the sovereign debt of other deficit-heavy countries. The yield on the 10-year Portuguese government bond rose above 5% yesterday, for example.

The best guide to how the market is setting the odds of the crisis expanding to other members of the European Union is the credit default swap market. Read more