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A request by Greece to trigger a $60 billion rescue package has failed to quell turmoil surrounding the country's bonds – heightening concerns that the debt contagion will force the European Union (EU) to bail out the region's other heavily indebted nations.
Greece on Friday asked the International Monetary Fund (IMF) and European governments to fund the emergency aid package to help fend off default when debt payments come due next month.
But instead of stabilizing the markets, uncertainty about Germany's willingness to fund its portion of the package, along with the potential for more bailouts, raised the cost of insuring Greek debt against default to a new record.
The euro plummeted after briefly bouncing off a 12-month low of $1.32 against the dollar Friday.
Credit-default swaps (CDS) on Greece roared upwards as much as 98.5 basis points to a record 713 and Portugal CDS jumped 39 basis points to an all-time high of 318. Contracts on Spain climbed 10.5 basis points to 184 and Ireland increased 16.5 to 200, according to CMA DataVision.
Credit default swaps pay the buyer face value if a borrower fails to adhere to its debt agreements. A price increase signals deterioration in investors' perception of the credit quality of the underlying debt instrument.
The spread on Portuguese 10-year bonds versus German bonds has widened more than 80 basis points over the last two weeks. The yield on the Portuguese 10-year bond rose to 5.3% Monday from 4.28% on April 12.
Analysts said the potential for the crisis to require more bailouts for other Eurozone members is a major concern.
Restructuring or rescheduling Greece's debt now looks "unavoidable," Mark Schofield, head of interest-rate strategy at Citigroup Inc. (NYSE: C) in London, wrote in a note to investors.
Greece's debt at the end of 2009 was recently revised to 13.6% of gross domestic product (GDP). Ireland had the euro region's largest deficit last year at 14.3% of GDP, followed by Greece, Spain at 11.2% and Portugal's 9.4%. That puts all four nations at more than three times the EU limit of 3%.
Swedish central bank First Deputy Governor Svante Oeberg said there is a risk that financial problems in the euro region will be "more dramatic" than they now appear.
"Greece is not the only potential problem," Oeberg said in a speech posted on the Web site of the Stockholm-based Riksbank. "Other countries also have major problems and in a worst-case scenario, this could develop into a debt crisis in several countries, which also affects the bank system."
Greece's fiscal crisis was the main topic of discussion at the weekend meetings of Group 20 (G20) finance ministers and central bankers in Washington.
"Greece has eclipsed everything," Sophia Drossos, co-head of global foreign-exchange strategy at Morgan Stanley (NYSE: MS) in New York told The Wall Street Journal. "It's a fluid and fast-moving situation that has captured the attention of markets not least because it has the potential to be a systemic threat."
There are divisions within Germany's coalition government about the process and speed of providing its $11.24 billion ($8.4 billion euros) share of the $40 billion (30 billion euros) EU package. The IMF is to provide another $20 billion (15 billion euros).
Greece has $11.3 billion (8.5 billion euros) in bonds that mature on May 19 and any delay in assistance may spark another sell-off of its assets that could then spread to global markets.
Italian Finance Minister Giulio Tremonti warned Germany against dragging its feet, telling The Journal "if your neighbor's house catches fire, it's not to your advantage to sit back."
"The whole thing is moving terribly close to the wire," Erik Nielsen, chief European economist at Goldman Sachs Group Inc. (NYSE: GS), said in a report to clients.
A deal is needed by around May 6 so aid can be delivered before debt payments come due, he said.
European Central Bank (ECB) officials in Washington played down speculation that Greece's woes could spill over to other high-deficit countries.
"There is no economic cause for a contagion discussion," ECB Governing Council member Ewald Nowotny told Bloomberg.
But former IMF Chief Economist Kenneth Rogoff told Bloomberg in an interview that Greece is unlikely to be the last euro nation to need IMF help, with Ireland, Spain and Portugal "conspicuously vulnerable."
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