Thursday

Greek debt crisis: ‘This could be bigger than anyone thought’

Filed under Economy & Trade

City traders are counting the cost of a tumultous two days of activity as Greece‘s sovereign debt problems threatened to mushroom into a wider financial crisis.

“The mood in here is not quite as bad as it was after Lehman Brothers went under, but that’s hardly a reason to celebrate,” said one City bond trader. “But there’s the same sense of not knowing how bad the contagion might get: sterling’s taking a battering, bond spreads are widening dramatically, gold’s flying again as investors flock to safe havens and bank lending across the EU is constricting, raising fears of another credit crunch.”

In the gleaming offices of investment banks in the City and Canary Wharf, economists have been trying to calculate their possible exposure to the Greek crisis and whether it could cause a domino effect across the EU’s less robust economies.

“I would say this is organised chaos,” said Michael Hewson, a market analyst at CMC Markets. “The problem the eurozone has at the moment is the market does not believe anyone has any concrete plan in place to deal with the problem of Greece. What that is causing is some rather shredded nerves among bond holders.”

According to David Jones, chief market strategist at IG Index, it feels like the early days of the credit crunch when Northern Rock went bust: “[It's] like when the run on the British banks started. Initially when the Greek crisis came to the fore, the thinking was ‘maybe it’s an isolated problem’, but with the downgrade on Tuesday and now concerns about Italy, Ireland and Portugal, the worry is that it is going to be much bigger than anybody thought.”

It was also causing chaos in the market for credit default swaps – the complex financial instruments used to insure against the possibility of a bond issuer defaulting on their payments – with the price of such insurance ballooning “because investors are paranoid that they are going to lose their shirts,” Jones said.

Hewson added: “Some of the countries that are providing the funds for the bailout are the same countries that are now having debt problems.”

The downgrade to Portugal’s credit rating, for instance, means that it will actually cost the country to take part in the eurozone bailout of Greece because when Portugal comes to the market to raise its portion of the bailout fund, it will be charged more to borrow than it will earn in interest from Greece.

Hewson says he sees parallels between this crisis and the period in the 1990s when Britain was ejected from the European exchange rate mechanism: “It compares in so far as you have no confidence in the monetary authorities of Europe to resolve the problem – but what you do not have is the European Central Bank intervening in the market to try and prop up the euro.”

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