Eurozone crisis escalates on Greek debt fears

Rising expectations that Greece will have to restructure its mountain of debt, possibly as early as this summer, sent the euro and the bonds of weak eurozone members tumbling on Monday in a dramatic escalation of the bloc's debt crisis. German government sources told Reuters in Berlin that they did not believe Greece, which sealed a 110 billion euro ($158 billion) bailout from the EU and IMF a year ago, would make it through the summer without a restructuring.
That development, combined with a new threat to Portugal's pending bailout from the rise of an anti-euro party in Finnish elections, hit market confidence in the bloc's ability to avert a new wave of contagion to bigger countries like Spain. After a brief lull in the crisis at the start of 2011, it has blown up again with full force and some analysts are now openly speculating that Greece and possibly other countries could eventually be forced to exit the bloc.
"You may see some countries deciding to leave the euro because they can't deal with the fiscal straitjacket that it imposes on them," Andrew Lynch, a fund manager at Schroders, told Reuters Insider. A restructuring of Greek debt would be the first by a west European nation in over half a century and represents a challenge of epic proportions for EU policymakers struggling to reconcile the interests of their citizens with the costly steps needed to preserve the integrity of the 17-nation currency area.
Greece, saddled with a debt burden that is expected to swell to 160 percent of gross domestic product by 2013, has denied repeatedly that it plans to restructure. Bank of Greece Governor George Provopoulos warned on Monday it would have "catastrophic consequences." But German newspaper Die Welt quoted an unnamed Greek minister as saying it was only a matter of time before the government took such a step.
And government sources in Berlin told Reuters that some form of debt restructuring now looked unavoidable and suggested Greece move fast, rather than wait until its funding situation gets critical next year. European shares sank to their lowest close in three weeks after Standard & Poor's cut its credit outlook for the United States to negative in a reminder that the eurozone is not alone in suffering from high debt and deficits.
The euro fell more than two cents to trade briefly below $1.42, its lowest level against the dollar in nearly two weeks. It appeared on track for its biggest one-day loss in at least two months. The cost of insuring Greek debt against default shot higher and pressure on other so-called peripheral countries mounted as well, with Spanish 10-year bond yields pushing towards record highs near 5.6 percent and Portuguese yields hitting a new peak of 9.4 percent.
Data on Monday showed an accelerated drop in Spanish housing prices in the first quarter and a surge in yields at a government treasury bill auction, ringing alarm bells across the currency area. Spain faces a further test of demand for its debt on Wednesday when it aims to raise 2.5 to 3.5 billion euros with two long-maturity issues.
In neighbouring Portugal, representatives of the European Commission, European Central Bank and International Monetary Fund were meeting government officials to set the terms for the bloc's third rescue in a year following multi-billion euro deals for Greece and Ireland.
After an election in Finland, however, that bailout could come under threat. The anti-euro True Finns party scored big gains in the Sunday vote and vowed immediately to push for changes to a Portuguese rescue that is expected to total 80 billion euros when it is finalised by a mid-May deadline. It may take weeks to find out whether True Finns will become part of a new government in Helsinki and be able to deliver on that threat. The party that won the most votes in Finland is pro-European and seems unlikely to compromise its stance even if it does end up in a coalition with True Finns.
Any delay in approving the bailout deal for Portugal beyond May could leave the country scrambling for new sources of funding. It faces an election on June 5 and has warned it will run out of money around the same time. Greece's debt load of 325 billion euros is nearly double the level most economists see as sustainable and far bigger than that of Argentina when it defaulted in late 2001.
In order to return the country to a sustainable path, most economists agree that it needs to wipe away roughly half the value of its outstanding debt, hitting private creditors with significant "haircuts" on their holdings. But EU leaders have promised not to make private debt holders pay before 2013. Doing so in the near-term, when the bloc remains vulnerable, could set off a contagion tsunami that engulfs Greek, German and French banks, raises pressure on Portugal and Ireland to restructure, and infects bigger eurozone members like Spain.