Page last updated at 11:44 GMT, Thursday, 8 April 2010 12:44 UK

The Greece debt crisis is far from over

By Andrew Walker
Economics correspondent, BBC World Service

Greece demonstrations
There have been protests in Greece over plans to cut its deficit

An International Monetary Fund (IMF) team has started work in Athens, with impeccable timing.

They are there, according to an IMF statement, to provide technical assistance - which means advice - on managing the public finances and collecting revenue.

But the chances that the IMF will have to do more and actually provide financial aid increased just as the visitors arrived.

A sharp spike in the financial markets for interest rates on Greek government debt suggests a very rocky road lies ahead.

In some see-saw trading, interest rates on 10-year borrowing went over 7%. Germany pays a little over 3% on borrowing the same currency for the same period.

The difference is a risk premium - the extra return investors want to compensate for the danger they perceive that Greece might not repay.

The direct impact of those market developments is on investors who already hold Greek government debt, or bonds. The price of the bond falls, so they make a loss.

It is, in effect, old debt with fixed payments that don't change, so there is no direct loss for the Greek Treasury.

Default risk

But the bad news is that these developments tell us something about how much Greece is likely to have to pay when it next seeks to borrow. And that will be fairly soon.

There is about 20bn euros ($26.7bn; £17.5bn) of debt due for repayment over the next two months. Greece has spare funds for some of that, but it will have to borrow more to cover the rest.

French President Nicolas Sarkozy, Spanish Prime Minister Jose Luis Zapatero, Greek Prime Minister George A. Papandreou and German Chancellor Angela Merkel
Eurozone leaders have agreed to help Greece if it needs financial assistance

Borrowing at the high interest rates now prevailing in the market for Greek debt would aggravate the risk of a default, by stretching the country's public finances even further.

And this increasing tension comes after Greece seemed to have won a respite last month, when eurozone leaders agreed that they would provide financial help, along with the IMF, if it were needed.

But there are now reports of differences within the eurozone over what interest rate Greece should pay on any rescue loan, with Germany holding out for a market rate - that is, a high one.

There are also growing concerns in the markets that Greece will struggle to borrow money from Asian and American investors.

The weak economic outlook is compounding the problem. A sharp fall in the Athens stock market reflects that anxiety.

Greece has its own domestic troubles, but the weakness of its eurozone export markets is another issue. New revised figures for the eurozone show growth ground to a halt in the final quarter of last year.

A Greek default would be a problem for the rest of its European partners, so they do have an incentive to act. Financial market turbulence would be a problem.

So far, the decline in the euro has been moderate - in fact probably rather welcome to exporters in Germany and elsewhere whose competiveness is enhanced as a result. But a rapid, disorderly fall would be much more of a problem.

Conflicting ideas

There are also many banks in Northern Europe exposed to potential debt problems in Greece and other financially stretched Southern European countries, such as Spain and Portugal.

Julian Pendock of the hedge fund Senhouse Capital says that German and French banks are potentially on the hook for well over $1 trillion (£650bn; 750bn euros).

So the chances of the IMF's help being needed are real.

That will raise potentially difficult questions about who is in charge of negotiating the economic policies Greece follows.

The IMF has worked alongside countries providing bilateral support many times before, but the fund has been in charge. The eurozone countries, however, might have their own ideas if Greece does need help.

The IMF team now in Athens are not armed with a chequebook. But they might need one soon.

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