The Greek Contagion Spreads

May 6, 2010 09:08

As of the end of 2009, European banks hold claims of $193 billion on Greece and more than $1 trillion of further claims on Portugal, Ireland and Spain.

Nouriel Roubini, Arnab Das and Elisa-Parisi Capone at

Even as the International Monetary Fund and eurozone have virtually finalized an unprecedented three-year financing package of 110 billion euros for Greece, financial markets remain unimpressed. The common currency continued to plunge this week, and long-term government bond yields in Greece and the periphery countries, including Italy, spiked again after a short relief rally before the agreement.

The market’s lukewarm reaction to the financing package confirms our view that a traditional financing package (Plan A), extended at unsustainable interest rates, will not allay solvency fears but rather lead to disorder and contagion. We have therefore consistently argued for a preemptive debt restructuring via maturity extension (Plan B) as the preferable solution for Greece. On May 4 Greek authorities confirmed that they contacted the investment bank Lazard for financial advice, but they categorically ruled out debt restructuring as an option under discussion.


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