Southern Eurozone’s Woes Simmer On

Greek election threatens bailout; Spain attacks central bankers while Italy is next in line

The European Central Bank headquarters in Frankfurt. (Photo: AP) The European Central Bank headquarters in Frankfurt. (Photo: AP)

Despite a weekend bailout for Spain’s banking sector that was meant to reassure investors, markets continued to punish the southern eurozone.

Yields remained high on Spanish and Italian bonds as a Greek voters threatened to reject bailout conditions in the election set for Sunday, and Prime Minister Mariano Rajoy of Spain challenged central bankers in the region to buy bonds and help counter the crisis. Italy had its own problems as Germany warned Rome to stick to its austerity program.

Bloomberg reported Wednesday that the most recent Greek polls show that Syriza, the party in favor of ditching the bailout—but not the euro—gained 3.5% this week, bringing it very close in popularity to New Democracy, the leading party, which supports the bailout.

Alexis Tsipras, the head of Syriza, has called for abandonment of the austerity conditions of Greece’s second bailout, although he insists he will keep the country in the euro. That could prove to be a challenge, since Germany and other more prosperous nations in the joint currency bloc have said that funds will be cut off if Greece fails to honor its agreement.

Greeks themselves fear the consequences of the election. Although, according to a Monday Reuters report, there has been talk among eurozone financial officials of instituting controls on how much money can be moved, and where to, should Greece depart the currency. Cash is already flowing out of Greek banks. Bloomberg reported Wednesday that withdrawals are on the rise.

A banker who asked not to be identified told Bloomberg that the rate of daily withdrawals is now at the upper end of a 100 million euro ($125 million) to 500 million euro range this month. Another banker said that the outflow could have exceeded 700 million euros as of Tuesday. Greeks fear that, should the country leave the currency, their savings will be slashed in value; to that end they are trying to hold on to cash in the form of euros rather than having to convert to drachmas.

The flood of money away from Greek banks “could accelerate the sequence of events leading to the emergence of a new currency,” according to Thomas Costerg, an economist at Standard Chartered Bank in London who was quoted in the report. Still, he pointed out that “Greek banks can tap the abundant central bank funding, which can offset the pressure coming from deposit flight.”

Reuters reported that some of the withdrawn money is being used, according to retailers, to stock up on such commodities as pasta and canned goods, as worried Greeks fear harsh conditions in the event of a euro exit. The report also quoted an unidentified pollster as saying that poll reports were exaggerated; as the election draws near, the publishing of poll reports is not allowed.

The pollster, identified only as reputable, was quoted saying, "This is nonsense. Our polls show the picture has not changed much since the last polls were published. Parties may be leaking these numbers on purpose to boost their standing."

Greece, of course, is not the only country suffering because of its financial crisis. On Tuesday Moody’s Investors Service cut the ratings of two banks in Cyprus, citing the increased risk of a Greek exit from the euro, and put a third Cypriot bank on review for a possible downgrade.

Bank of Cyprus (BOC), Cyprus’ largest lender, saw its deposit and senior unsecured debt ratings cut by one notch to B2 from B1; its standalone credit assessment was lowered to B3 from B2. Hellenic Bank Ltd also saw its deposit ratings lowered by a notch, from Ba3 to B1, and its standalone credit assessment reduced to B2 from B1. Both were put on review for possible further downgrades.

The country’s second largest lender, Cyprus Popular Bank (CPB), was put on review for downgrade without other action being taken.

The Mediterranean island has the third smallest economy in the eurozone. Much of its population is Greek Cypriot. In a statement, Moody’s said, "The rated Cypriot banks maintain extensive branch operations in Greece, with exposures to Greek borrowers amounting to 42% of net loans for CPB, to 34% of gross loans for BOC, and 17% of gross loans for Hellenic. As such, their capital positions remain susceptible to the direct and indirect consequences of a Greek exit."

The agency added, "Although a Greek exit is not Moody's central scenario, the rating agency says that it considers the risk of a euro exit by Greece as substantial and recognizes that the probability of such an outcome may increase further following the Greek parliamentary elections on 17 June."

In Spain, meanwhile, Rajoy said Wednesday that he would “battle” central bankers who are refusing to buy debt from peripheral eurozone countries. In a letter to European Union leaders, he called for them to buy bonds and thus help countries struggling to right their financial woes. He told the Spanish parliament, “That is the battle we have to wage in Europe. I am waging it.”

Rajoy may not be battling only for Spain, but for Italy as well. According to James Nixon, chief European economist at Societe Generale in London, “The crisis will inevitably roll on to the next domino, and that’s Italy.” Nixon was quoted in the report saying, “The southern European economies are effectively in free-fall and market appetite for southern European debt is rapidly drying up. I can’t see anything to turn that dynamic around.”

Italy is struggling under tough fiscal measures instituted by Prime Minister Mario Monti, whose popularity has seen a decline since he instituted spending cuts, labor changes and higher taxes. Concern over the country’s ability to stay the course, lest it follow Spain into bailout territory, led Finance Minister Wolfgang Schaeuble to say Wednesday, "If Italy continues along Monti's path there will be no risks."

Schaueble was quoted in the Italian daily newspaper La Stampa saying that Italy had made considerable progress with Monti at the helm. "This is acknowledged everywhere in Europe and by the markets,” he said in the report. “I can only hope that political forces in the Italian parliament and public opinion continue to decisively back him, because the road towards a return to sustainable growth through structural reforms, improved competitiveness and a lower deficit is the right one."

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