Beware Contagion From Greeks Baring Rifts?

Euro-zone politicians may be fiddling while Athens burns. Tuesday's meeting of finance ministers brought no progress on how to address Greece's funding problems and avoid setting off a financial crisis. But conditions in European markets are deteriorating. The main risk from Greece has always been contagion, and that process is already under way.



Most directly, prices of Portuguese and Irish bonds have fallen sharply, with 10-year yields rising above 11% and the cost of insuring their debt at record levels. The gap between Spanish and German 10-year bond yields is at its widest since January. The market is effectively giving no credit for any reforms or budget policies set out in the past six months.



The next link in the chain, the banking system, has been affected. In Spain, progress by banks on regaining market access has gone into reverse: Average borrowing from the European Central Bank jumped to €53 billion ($76.32 billion) in May from €42 billion in April.



Meanwhile, the contagion into core banks may be being underestimated by investors. Moody's on Tuesday said it could downgrade France's BNP Paribas, Société Générale and Crédit Agricole due to their holdings of Greek debt, and the ratings firm is looking at whether other banks could face similar risks.



Disturbingly, the worries have now reached non-financial companies, which have been virtually bulletproof this year. Investment-grade bond issuance has come to a near-standstill. The yield premium on Portugal Telecom's February 2016 euro bond over German Bunds has widened a stunning 2.3 percentage points in the last two weeks, data from Société Générale show. Italian and Spanish credits are under pressure too. The credit market now starts by pricing government risk and then works back to price debt from financials and companies, one investor says: Greece is a destabilizing influence at the center of the market's deliberations.



When German Finance Minister Wolfgang Schäuble last week proposed a seven-year maturity extension for Greek bondholders, setting up the current standoff with the ECB, he suggested there was a chance to minimize the negative impact on financial markets. That was always an optimistic hope. The reality is that markets are starting to wake up to the risks of a Greek debt restructuring. Europe's politicians need to act fast to stem the tide.

Markets have started to wake up to the risks of Greek debt restructuring? No kidding? The problem is that Eurozone politicians still have their heads up their asses (I'm sorry, calling it like I see it, and there is no way I'm going to sugarcoat it). With each passing day, there is a huge risk of another international banking crisis -- and this one will make 2008 look like a walk in the park! (Had lunch with two of Montreal's most promising hedge fund managers yesterday and they're both bearish on this market).

Meanwhile, over in Greece, Reuters report that Greeks of all ages want politicians to pay:

Greek workers of all ages and professions, pensioners, students, the old and young marched on parliament in Athens Wednesday to vent their anger at the country's politicians and their austerity plans.



Tens of thousands took part in the protest rally, which follows three weeks of peaceful evening gatherings in the central Syntagma Square of people from all walks of life, tired of tightening their belts a year after Greece received an EU/IMF bailout.



"I feel rage and disgust," 45-year-old civil servant Maria Georgila, a mother of two, said in front of parliament.



"These measures are very tough and they won't get us out of the crisis. I can't believe they have no alternative."



Like others yelling "Thieves!" and raising open hands toward parliament in a traditionally offensive gesture, 38-year-old Maria Koutroumba said she felt betrayed.



"They are traitors, they've plagued the country," the unemployed woman said of the politicians as she helped form a human chain around the parliament building.



"These measures are hurting us, the ordinary people," said Koutroumba, who used to get by on short-term contracts in the private sector but is now out of work, like over 800,000 Greeks.



The jobless rate hit a record 16.2 percent in March as cutbacks to rein in Greece's huge debt burden of 340 billion euros stifled the economy further. The EU and the IMF expect the Greek economy to contract 3.8 percent this year.



Greece's international lenders have also insisted that the country sell 50 billion euros of state assets to reduce its debt mountain.



"More people must take to the streets and say that Greece is not for sale," said Koutroumba, who spent the night on the square and said she would stay as long as needed.



Greek lawmakers were due to discuss a new austerity package of 6.5 billion euros in tax rises and spending cuts this year, including higher tax on cars and restaurants and slashing the public sector workforce.



"We wouldn't be here if they (the politicians) had made sacrifices as well," said 60-year-old pensioner Panayotis Dounis, who said he had joined the non-political rally in front of parliament nearly every night for about half an hour.



BREAD AND OLIVES



Dounis said he wanted no violence at the anti-austerity rallies. Most protesters marched peacefully Wednesday, though the rally was marred by clashes between stone-throwing youths and police.



"I am willing to make sacrifices, to live only on bread and olives, but what are they (politicians) doing for us?" asked the former builder, who retired last year.



"I want them to work for four years without getting paid, for Greece, for their country," said Dounis, whose three children are jobless and who believes MPs can afford to work for free for a while.



Singer Vassilis Theodorakopoulos, 32, who performs in various places to make ends meet, has been camping in central Syntagma Square for the past 20 days.



"All of these governments must vanish," he said. "We want to reorganize Greece away from any memorandum, the EU and the IMF."

If I were an ordinary Greek citizen, I would be enraged as well. While Greece's elite are parking their money offshore in Cyprus, Switzerland, UK and Germany, most Greeks are struggling to get by on crumbs, bearing the brunt of the strict austerity measures being imposed on them. There is no long-term game plan on creating jobs, much like in the US where the jobs crisis is getting worse. I think politicians from around the world should carefully listen to professor Robert Shiller below on how to revive America's 'animal spirits'.