Ambrose Evans-Pritchard: Greek crisis escalates into global margin call

By Ambrose Evans-Pritchard, The Telegraph, London

For the third time in 18 months the global financial system risks spinning out of control unless political leaders take immediate and radical action.

Flow data shows an abrupt withdrawal of German and Asian capital from Club Med debt markets. The EU’s refusal to offer Greece anything beyond stern words and a one-month deadline for harsher austerity — while admirable in one sense — is to misjudge how fast confidence is ebbing. Greece’s drama has already metastasised into a wider systemic crisis. The world risks a replay of the Lehman collapse if this runs unchecked, this time involving sovereign dominoes.

Barclays Capital says the net external liabilities of Greece are 87 percent of GDP, or E208 billion). Spain is worse at 91 percent , and Portugal worse yet at 108 percent. Ireland is 68 percent, Italy is 23 percent. Add East Europe’s bubble and foreign debts top E2 trillion.

The scale matches America’s sub-prime/Alt-A adventure and assorted CDOs and SIVS of the Greenspan fling. The parallels are closer than Europe cares to admit. Just as Benelux funds and German Landesbanken bought subprime debt for high yield with AAA gloss, they bought Spanish Cedulas because these too had a safe gloss — even though Spain’s property boom broke world records. They thought EMU had eliminated risk; it merely switched exchange risk into credit risk.

A fat chunk of Club Med debt has to be rolled over soon. Capital Economics said the share of state debt maturing this year is even higher in Spain (17 percent) than in Greece (12 percent), though Spain’s Achilles’ Heel is mortgage debt.

The risk is the EMU version of Mexico’s Tequila crisis or Asia’s crisis in 1998. This Ouzo crisis is coming to a head just as tougher bank rules cause German lenders to restrict loans, and it touches on the most neuralgic issue of our day: that governments themselves are running low. Britain, France, Japan, and the US are all vulnerable. All must retrench. The great “reflation trade” of 2009 is over.

Far from containing the crisis, Europe’s response recalls the Lehman/AIG events of 2008 when Brussels sat frozen and Germany dragged its feet. On that occasion France took charge, in the nick of time.

Today’s events will not wait. The rocketing cost of CDS default insurance on Iberian debt speaks for itself. Lisbon retreated from a E500 million bond issue last week, even before the government lost a crucial finance vote. Can Athens raise money at all on viable terms?

There are echoes of early 2009 when East Europe blew up, with contagion hitting global bourses, commodities, and iTraxx credit indices. That episode was halted by the G20 deal to triple the IMF’s firefighting fund to $750 billion. The odd twist today is that Greece cannot turn to the IMF because that offends EMU pride, yet no other help is on offer because the EU has no fiscal authority. Greece lies prostrate between two stools.

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