Greek problem - an issue of contagion

Hard to say what the EU will do with Greece. There is a “no bail-out clause” in the Maaschrit Agreement so the EU governments have to be creative in their handling of the situation. There is also a significant moral hazard problem because the other PIIGS may need money. If you do something for one, there will be expectations that something will have to be done for others.The size of Greece within the EU is small. It is the contagion which is the problem.

Spreads on Greek 10-year bonds have moved up to 370 bps over bunds. The spreads have been moving in only one direction because it is hard to find any buyers for Greek bonds.There are no comparable spreads because when they were higher was before the introduction of the Euro.

The deficit to GDP will be just under 13% assuming that the tally of all liabilities is correct. This is a brash assumption when it comes to Greece as the EU has found out that differences in government accounting can have a strong impact on the numbers.

Does EU need the IMF? This is an interesting question. They have the money and know-how to impose austerity programs. It would be a political embarrassment, but it gets the EU off the hook.

This is a problem that will not go away anytime soon and should be considered the next shoe to drop in the same credit crisis.