Fears of 'Lehman-Style' Tsunami as Crisis Hits Spain and Portugal

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by Ambrose Evans-Pritchard: Should
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The Greek debt
crisis has spread to Spain and Portugal in a dangerous escalation
as global markets test whether Europe is willing to shore up monetary
union with muscle rather than mere words.

Julian Callow
from Barclays Capital said the EU may to need to invoke emergency
treaty powers under Article 122 to halt the contagion, issuing an
EU guarantee for Greek debt. “If not contained, this could
result in a `Lehman-style’ tsunami spreading across much of
the EU.”

Credit default
swaps (CDS) measuring bankruptcy risk on Portuguese debt surged
28 basis points on Thursday to a record 222 on reports that Jose
Socrates was about to resign as prime minister after failing to
secure enough votes in parliament to carry out austerity measures.

Parliament
minister Jorge Lacao said the political dispute has raised fears
that the country is no longer governable. “What is at stake
is the credibility of the Portuguese state,” he said.

Portugal has
been in political crisis since the Maoist-Trotskyist Bloco won 10pc
of the vote last year. This is rapidly turning into a market crisis
as well as investors digest a revised budget deficit of 9.3pc of
GDP for 2009, much higher than thought. A €500m debt auction
failed on Wednesday. The yield spread on 10-year Portuguese bonds
has risen to 155 basis points over German bunds.

Daniel Gross
from the Centre for European Policy Studies said Portgual and Greece
need to cut consumption by 10pc to clean house, but such draconian
measures risk street protests. “This is what is making the
markets so nervous,” he said.

In Spain, default
insurance surged 16 basis points after Nobel economist Paul Krugman
said that “the biggest trouble spot isn’t Greece, it’s
Spain”. He blamed EMU’s one-size-fits-all monetary system,
which has left the country with no defence against an adverse shock.
The Madrid’s IBEX index fell 6pc.

Finance minister
Elena Salgado said Professor Krugman did not “understand”
the eurozone, but reserved her full wrath for the EU economics commissioner,
Joaquin Almunia, who helped trigger the panic flight from Iberian
debt by blurting out that Spain and Portugal were in much the same
mess as Greece.

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the rest of the article

February
6, 2010

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