Greek Fire, Part 26

Spreads on Greek bonds compared to their benchmark German counterparts hit a whopping 1000 basis points today.  News that Portugal will need a lifeline imminently too is driving the run on the euro right now.

The 10-year bond yield exceeded the equivalent German yield by 10 percentage points for the first time, only a day before a euro1.5 billion ($1.96 billion) auction of 6-month treasury bills - considered an important test of market sentiment.

Greece has launched a major effort to cut borrowing costs in exchange for bailout loans worth euro110 billion from the IMF and other countries using the euro.

The government says it wants to return to long-term bond markets sometime this year.

But the interest gap, or spread, on 10-year bonds compared with the German issue reached a worrying 1,001.1 basis points amid renewed worries about some EU nations' fight to handle heavy debt loads.

Greece's Socialist government is struggling to push through reforms demanded by bailout-loan inspectors that are meant to replace drastic one-off spending cuts and emergency tax measures with longer-term fiscal improvements.

Problem is, without borrowing Greece can't fund those improvements, and that means more drastic cuts ahead.   Things are getting nasty in the eurozone now, as the next bailout contestant is looking to be Portugal.

A senior euro zone source told Reuters on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek an EU-IMF assistance programme, following Greece and Ireland, in a bid to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.

That would leave Spain as the only PIGS country without a bailout if that happens, and everyone says SPain is too big to bail out.  We'll find out before too long, I think.