Capital markets may be facing the biggest crisis in a century with governments all but powerless to ward off a sovereign debt disaster, according to Gary Jenkins at Evolution Securities Ltd.
Investors greeted plans for a 110 billion-euro ($143 billion) bailout of Greece by shunning the bonds of Europe’s debt-ridden nations on concern the aid package won’t solve the country’s deficit crisis or prevent contagion. Credit-default swaps on Greece, Spain, Portugal and Italy surged and the euro tumbled.
“The capital markets could soon be in the midst of the largest financial crisis of the last 100 years,” said London- based Jenkins, Evolution’s head of credit strategy. “With government debt itself perceived to be the problem the potential for political and economic change is much greater.”
While the bailout package reduces the “very real risk” of a Greek default, it doesn’t change investors’ view that the country’s debt will be restructured in the medium term, Jenkins said. The European Central Bank may be asked to buy government bonds should markets continue to tumble, he said.
Such purchases would mean either buying bonds on the secondary market -- the more likely option -- or promising to finance Greece’s planned bond redemptions, or both, according to Padhraic Garvey, a strategist at ING Groep NV in Amsterdam.
The ECB purchasing bonds “would be the nuclear option as it would taint the ECB both politically and in terms of its asset/liability mix,” Garvey wrote in a note to investors. “That said, if we approach the brink, it may just be the only viable option left. Only the ECB can print euros to save the system.”
Other possibilities include governments forcing domestic investors to buy their bonds, or “for policy makers and Greek holders alike to cross their collective fingers and hope that some positive follow-through begins to dominate in the weeks and months to come,” Garvey wrote.
The problem with doing nothing is that Portugal, Spain and Ireland risk being “dragged further into the Greek slipstream,” according to Garvey.
“These are worrying times, and in fact more worrying than last week,” when the bailout package from the EU and the International Monetary Fund was in prospect, Garvey wrote. “This week, both of those items are now behind us and thereby in the price.”