Saturday, May 01, 2010

Eurozone PIIGS sovereign debt the new subprime?

The eurozone "lurched towards the endgame" as Standard & Poor's relegated Greece's sovereign credit rating to "junk" status, downgraded Portugal by two steps to A-, and the yields on Greek debt climbed beyond 15 per cent, a signal that the market regards a default as virtually certain.

The course of events has parallels with the banking crises of the autumn of 2008, when successive institutions came under attack and their interrelationships and size devastated confidence in the financial system. For many observers, it was a matter of "for Lehman's, read Greece", as sovereign debt became the new sub-prime. Again there was classic domino effect: bond yields also rose in the other so-called PIIGS group of highly indebted nations – Ireland, Spain and even Italy, as investors demanded higher risk premia to take on these governments' debts.

It raises fears of a sovereign debt crisis on a pan-eurozone scale, and beyond even the resources of Germany and France to resolve, and could leave the very future of the euro in doubt. Should that happen, or appear remotely likely, then it could plunge the world economy into a further crisis of confidence.

The Independent

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