Greek Quarantine Tested as Spain Denounces Contagion (Update2)

By Emma Ross-Thomas and Natalie Weeks
May 5 (Bloomberg) -- Investors are already testing the euro region’s efforts to contain the Greek crisis.
Greek bond yields rose yesterday above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area.
"If the execution of the announced measures in Greece faltered, it would certainly make it more difficult to bring the sovereign debt markets of Spain and Portugal into calmer waters," said Kommer van Trigt, who helps oversee 140 billion euros ($181 billion) at Robeco Group in Rotterdam. "We want to see more evidence that measures are really being implemented."
European governments are hoping that Greece’s 110 billion- euro bailout will stop a crisis that Nobel Prize-winning economist Joseph Stiglitz says threatens the currency’s survival. Investors are speculating that Spain and Portugal may also eventually need assistance, prompting Spanish Prime Minister Jose Luis Rodriguez Zapatero to dismiss such talk as "complete madness."

Bonds Tumble

That didn’t stop a sell-off in Spanish bonds continuing today. The extra yield that investors demand to buy its debt over German bunds rose to a 15-month high of 120.4 basis points.
Spain’s benchmark IBEX Index, the euro region’s worst performer, fell 2.7 percent, extending a decline of 5.4 percent yesterday.
Portugal’s spread increased 8 basis points to 254.7 basis points.
The euro weakened to the lowest in more than a year, and trading at $1.2941 at 8:45 a.m. in London.
Greek unions plan their third general strike of the year today after workers occupied the Acropolis yesterday and shut down schools and hospitals at the start of a 48-hour walk-out.
Aegean Airlines SA, a Greek carrier, has canceled all flights.
Workers are protesting against the 30 billion euros of austerity measures agreed to by Prime Minister George Papandreou in return for the bailout from the euro region and the International Monetary Fund. Protesters will meet at Pedio tou Areos Park in central Athens and will march through Constitution Square, where the Parliament is situated.

‘Massive’ Protest

"We will continue with action as long as these measures, which go against workers and are anti-social, continue to be demanded," Stathis Anestis, a spokesman for the GSEE union, said in a telephone interview, predicting "massive participation."
The yield on Greece’s 10-year bond eased to 9.375 percent from 9.397 yesterday. It traded at 8.962 percent on April 30.
Investors may turn to the relative attraction of Asia’s bonds because economic expansion in the region means sovereign balance sheets are stronger, according to Standard & Poor’s.
"The growth story and sovereign-balance story in Asia looks relatively better, much better in some cases," William Hess, director of sovereign ratings for S&P in Asia, said in an interview this week in Tashkent, Uzbekistan.
More than 51 percent of Greeks said they won’t accept new austerity measures before the rescue deal, according to a poll of 1,000 people by ALCO for Proto Thema newspaper. That compared with 33 percent who would accept them. No margin of error was given for the poll conducted from April 27 to April 29.

Union Record

Unions have had some success influencing policy in the past. They forced then-Prime Minister Costas Simitis to dilute proposals such as raising the retirement age in 2001. Unions successfully opposed a government proposal in 1985 to cut spending and boost tax revenue, prompting Simitis, who was economy minister at the time, to resign two years later.
Some economists say the terms are too harsh for the country to bear. Greece expects its economy to shrink 4 percent this year and 2.6 percent in 2011.
"The economic pain that such belt tightening will bring suggests that it would be unwise to rule out a default further down the line," Ben May, an economist at Capital Economics in London, said in a note.
The danger for the euro region is that failure to end the Greece crisis after three months of wrangling by EU leaders will prompt investors to shift attention to the deficits of Portugal and Spain, and dump their bonds too. Spain’s budget gap was the area’s third highest last year, at 11.2 percent of GDP.
Portugal’s shortfall was fourth at 9.4 percent of output.

IMF Denial

The IMF published a statement yesterday denying speculation that Spain had asked for a bailout.
"These rumors can increase the interest-rate differential compared with German bonds and damage our national interests,"
Zapatero told a news conference in Brussels yesterday. "This is simply intolerable and I can tell you that we will certainly combat it."
Ireland had the highest deficit at 14.3 percent and Greece’s was 13.6 percent.
While the Greek rescue "may work for a little while, in the long run the fundamental institutional problems are there, speculators are aware of these problems," said Stiglitz, a Columbia University professor, in an interview with BBC Radio 4 yesterday. "The future of the euro may be limited."