# Geoffrey T. Smith and William Horobin
# From: The Wall Street Journal
THE European debt crisis loomed larger again today as officials worried that financial markets could thwart efforts to get countries such as Greece back on even fiscal footing.
Moody's Investors Service added to those concerns, warning that a Greek debt restructuring could affect the credit ratings of other European governments and would probably also lead to rating downgrades for Greek banks.
"The full impact on Europe's capital markets would be hard to predict and harder still to control. The fallout would have implications for the creditworthiness (and hence the ratings) of issuers across Europe," the Moody's report said.
European Council president Herman van Rompuy acknowledged in a speech in Paris last night that Greece is having trouble adjusting in a hostile market.
"They don't give Greece time to adjust, and that's a pity," he said. Even so, Greece has to press on with spending cuts, he said. "If there is a slippage they have to correct as soon as possible."
Europe's struggle to regain investor confidence in its high-debt member states has suffered a series of setbacks since the end of last week, fuelling speculation that at least Greece might have to seek more relief from creditors.
Many market watchers speak of growing uncertainty as European Union leaders decide on next steps ahead of their June 23-24 summit.
The European debt crisis is far from over and is still a danger, said the head of the Organisation for Economic Co-operation and Development last night.
"The sovereign-debt crisis continues to threaten the outlook for some countries and the region as a whole because of the markets' connections," the OECD's Angel Gurria said at his opening address to the OECD annual forum in Paris.
"Not only is the crisis not over yet, it is only really changing its face," he said. "How can we think it is over when average unemployment is close to 10 per cent?"
Moody's warned on Friday about Italy's debt. And on Sunday, the ruling Socialist party in Spain was routed in regional elections as voters protested a 21 per cent jobless rate and painful budget cuts.
Most economists say the 17-country euro zone can cope with the cost of rescuing Greece, Portugal and Ireland, which between them account for only 5 per cent of the region's output. But the situation would look far worse if markets lose confidence in the solvency of Spain, whose economy is nearly twice as large as the other three combined.
"The Spanish government took courageous measures, (and) I think they need to go further in that way," Mr van Rompuy said.
Europe's banks have around $US630 billion ($597bn) in loans and bondholdings at risk there, according to data from the Bank for International Settlements, so a financial crisis in Spain would almost certainly become a pan-European one.
The euro has fallen sharply over the last week as investors sought safer havens. A cluster of major economic indicators showed a slowing economic recovery in the euro-zone private sector in the current quarter.
But the focus remained on Greece, with the cost of insuring its government's debt against default soaring to a new record high last night.
Recently French Finance Minister Christine Lagarde and other EU officials have acknowledged that Greece might have to get its creditors to agree on longer maturities for debt expiring in the next two years.
International opinion has been shaken by the obvious willingness of Germany and the more subtle support of France to "involve the private sector" in any further measures to keep Greece afloat, pressure for which has risen in parallel with the likelihood of EU taxpayers having to bankroll Athens through 2012, a year longer than planned.
The OECD's Mr Gurria told the French newspaper Le Figaro yesterday that the rescheduling of Greece's debt "doesn't seem a bad idea" because it would give the country more time to digest its current austerity measures.
"To grant extra time to repay is a lesser evil that doesn't mean the debt's principal is reduced," Mr Gurria said.
The European Central Bank continues to dig in its heels, warning that any change in the status of Greece's debt would spread default fears elsewhere in Europe and ruin the Greek banking system.
Members of the ECB's governing council have been taking turns pointing out the dangers for the euro zone, the euro and the banking system if doubts are raised about outstanding government debt.
Banque de France governor Christian Noyer last night called it "a horror scenario" that would cause the Greek economy to collapse.
"You can't ask the European taxpayer to pay for Greece's bailout and then restructure the debt," Mr Noyer said.
He said that the ECB couldn't accept restructured Greek bonds as collateral for lending to banks, meaning that the Greek banking system, which needs more than 90bn euros ($120.3bn) in ECB money to bridge the gap between its liquid assets and liabilities, would seize up completely in the event of a default.
www.theaustralian.com.au
# From: The Wall Street Journal
THE European debt crisis loomed larger again today as officials worried that financial markets could thwart efforts to get countries such as Greece back on even fiscal footing.
Moody's Investors Service added to those concerns, warning that a Greek debt restructuring could affect the credit ratings of other European governments and would probably also lead to rating downgrades for Greek banks.
"The full impact on Europe's capital markets would be hard to predict and harder still to control. The fallout would have implications for the creditworthiness (and hence the ratings) of issuers across Europe," the Moody's report said.
European Council president Herman van Rompuy acknowledged in a speech in Paris last night that Greece is having trouble adjusting in a hostile market.
"They don't give Greece time to adjust, and that's a pity," he said. Even so, Greece has to press on with spending cuts, he said. "If there is a slippage they have to correct as soon as possible."
Europe's struggle to regain investor confidence in its high-debt member states has suffered a series of setbacks since the end of last week, fuelling speculation that at least Greece might have to seek more relief from creditors.
Many market watchers speak of growing uncertainty as European Union leaders decide on next steps ahead of their June 23-24 summit.
The European debt crisis is far from over and is still a danger, said the head of the Organisation for Economic Co-operation and Development last night.
"The sovereign-debt crisis continues to threaten the outlook for some countries and the region as a whole because of the markets' connections," the OECD's Angel Gurria said at his opening address to the OECD annual forum in Paris.
"Not only is the crisis not over yet, it is only really changing its face," he said. "How can we think it is over when average unemployment is close to 10 per cent?"
Moody's warned on Friday about Italy's debt. And on Sunday, the ruling Socialist party in Spain was routed in regional elections as voters protested a 21 per cent jobless rate and painful budget cuts.
Most economists say the 17-country euro zone can cope with the cost of rescuing Greece, Portugal and Ireland, which between them account for only 5 per cent of the region's output. But the situation would look far worse if markets lose confidence in the solvency of Spain, whose economy is nearly twice as large as the other three combined.
"The Spanish government took courageous measures, (and) I think they need to go further in that way," Mr van Rompuy said.
Europe's banks have around $US630 billion ($597bn) in loans and bondholdings at risk there, according to data from the Bank for International Settlements, so a financial crisis in Spain would almost certainly become a pan-European one.
The euro has fallen sharply over the last week as investors sought safer havens. A cluster of major economic indicators showed a slowing economic recovery in the euro-zone private sector in the current quarter.
But the focus remained on Greece, with the cost of insuring its government's debt against default soaring to a new record high last night.
Recently French Finance Minister Christine Lagarde and other EU officials have acknowledged that Greece might have to get its creditors to agree on longer maturities for debt expiring in the next two years.
International opinion has been shaken by the obvious willingness of Germany and the more subtle support of France to "involve the private sector" in any further measures to keep Greece afloat, pressure for which has risen in parallel with the likelihood of EU taxpayers having to bankroll Athens through 2012, a year longer than planned.
The OECD's Mr Gurria told the French newspaper Le Figaro yesterday that the rescheduling of Greece's debt "doesn't seem a bad idea" because it would give the country more time to digest its current austerity measures.
"To grant extra time to repay is a lesser evil that doesn't mean the debt's principal is reduced," Mr Gurria said.
The European Central Bank continues to dig in its heels, warning that any change in the status of Greece's debt would spread default fears elsewhere in Europe and ruin the Greek banking system.
Members of the ECB's governing council have been taking turns pointing out the dangers for the euro zone, the euro and the banking system if doubts are raised about outstanding government debt.
Banque de France governor Christian Noyer last night called it "a horror scenario" that would cause the Greek economy to collapse.
"You can't ask the European taxpayer to pay for Greece's bailout and then restructure the debt," Mr Noyer said.
He said that the ECB couldn't accept restructured Greek bonds as collateral for lending to banks, meaning that the Greek banking system, which needs more than 90bn euros ($120.3bn) in ECB money to bridge the gap between its liquid assets and liabilities, would seize up completely in the event of a default.
www.theaustralian.com.au
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