Wall Street Journal
June 16, 2011
Euro-zone politicians may be fiddling while Athens burns. Tuesday's meeting of finance ministers brought no progress on how to address Greece's funding problems and avoid setting off a financial crisis. But conditions in European markets are deteriorating. The main risk from Greece has always been contagion, and that process is already under way.
Most directly, prices of Portuguese and Irish bonds have fallen sharply, with 10-year yields rising above 11% and the cost of insuring their debt at record levels. The gap between Spanish and German 10-year bond yields is at its widest since January. The market is effectively giving no credit for any reforms or budget policies set out in the past six months.
The next link in the chain, the banking system, has been affected. In Spain, progress by banks on regaining market access has gone into reverse: Average borrowing from the European Central Bank jumped to €53 billion ($76.32 billion) in May from €42 billion in April.
Meanwhile, the contagion into core banks may be being underestimated by investors. Moody's on Tuesday said it could downgrade France's BNP Paribas, Société Générale and Crédit Agricole due to their holdings of Greek debt, and the ratings firm is looking at whether other banks could face similar risks.
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