Greek bailout is looking increasingly likely

You know a country is in real financial trouble when its leaders start muttering about conspiracies by foreign speculators. The Greeks have already done it and yesterday the Spanish joined in.

The Spanish attempts to calm bond market investors seemed to have little effect, although the euro, which was beaten up badly last week, strengthened slightly. But the pound continued to suffer from the flight into the dollar.

Many currency experts expect the dollar to continue to strengthen, with some of them warning that unwinding of the dollar carry trade — which involves borrowing cheaply in dollars to invest in higher-yielding currencies — could see the US currency spike.

For the euro, Greece remains the biggest worry, with attention shifting yesterday to the country’s banking system.

Government officials insisted that everything was fine, but bankers reported that the “repo” market was virtually closed to Greek borrowers. Repo is a well-used funding device by banks, which sell an asset, such as a government bond, and agree to buy it back within a month, paying an interest rate for use of the short-term money.

The alternative is more borrowing at the European Central Bank window, where Greek banks have been regular visitors. Greek institutions are mainly financed by deposits, according to Fitch, so we are not dealing with an imminent Northern Rock-style crunch. But it raises the question of who will finance a Greek recovery.

Some sort of bailout by the rest of the eurozone is looking more likely by the day.

David Wighton, The Times 09-02-2010

Writers name

David Wighton, The Times

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