Greece shakes the markets again as Bank warns of eurozone shocks

Thursday, June 24, 2010
By Paul Martin

By Sean O’Grady
Friday, 25 June 2010

Fears that the Greek government may soon have to tap its €110bn eurozone/IMF rescue package sent the cost of insuring Greek government bonds against default soaring to record highs yesterday – and hit UK banks shares in London badly, thanks to the “contagion” factor.

The latest crisis to hit the eurozone’s financial system came as the Bank of England warned that the British banks remained vulnerable to shocks from the single currency area, and faced an £850bn funding gap over the next few years, the largest among the advanced economies.

The Bank said: “Banks’ long-term credit ratings benefit from the implicit support given by governments. A broad-based rise in sovereign risk concerns would reduce the perceived value of such support to banking systems. This would tend to put downward pressure on banks’ credit ratings. UK banks are among those vulnerable to these pressures.”

At more than 10 percentage points the credit default swap premia – in effect an insurance premium on Greek government bonds – yesterday spiked higher even than it did during the May crisis. It signals the near-certainty among market players that a Greek default, or “restructuring” is inevitable and may arrive sooner than expected. The imminent withdrawal of one of the European Central Bank’s special schemes has apparently spooked investors.

As has happened frequently before, the euro was pushed sharply down against the dollar on fears that the “contagion” may spread. Sterling reached a 19-month high against the euro: Spanish CDS also went higher yesterday.

The Rest…HERE

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