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Greece to Face Bankruptcy?

On February 26, George Papandreou, the prime minister of Greece warned of a national bankruptcy unless public spending is slashed as German banks vowed to shun Greek debt and the government was said to be readying a critical bond issue.

Papandreou asked lawmakers in Athens, “Are we going to let this country go bankrupt or are we going to react?”

According to a report in The Wall Street Journal, Greece delayed a major bond issue due the same week Papandreou spoke to lawmakers that was aimed at raising 3-5 billion euros due to turbulence after a general strike on February 24 and warnings of potential credit rating downgrades. The report said the issue was delayed until the following week.

The report said that many view the new bond as a “test of the Greek government’s ability to raise money in the capital markets to finance its operations and retire old debt.”

In another development that has caused concerns, several major German banks, Commerzbank subsidiary Eurohypho, Hypo Real Estate, and Postbank, said on February 26 that they would shun Greek government bonds.

The Bank of International Settlements, the so-called central bank’s central bank, said that German banks have been among the largest buyers of the Greek government’s debt.

The German banks’ remarks are likely seen as significant in that they signal a belief that bonds issued by Greece have become took risky for some investors in high-class sovereign debt.

However, Greek bonds rallied on February 26 on a report of Germany considering coming to the country’s aid.

Late on February 25, the yield on the 10-year Greek sovereign bond fell from 6.64 percent to 6.379 percent. Bond prices and yields move in opposite directions.

Greece has the largest public deficit in the eurozone and its fiscal woes have brought the euro’s value down and raised concerns for bloc’s cohesiveness.

Analysts at Goldman Sachs say that Greece has raised approximately 14 billion euros ($19 billion) of an estimated 55 billion euros in financing needs this year. It also has 20 billion euros in debt service payments due in April and May.

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