First it was the “Death Spiral,” now it is the “Death Circle.”
George Soros told a Greek TV station last night that the government in Athens is facing the prospect of both recession and falling budget revenue if yields on Greek debt remain this high.
The comments will be as welcome in Athens, Brussels and Berlin as giant cloud of ash as authorities across the euro zone fret over the impact of the European Union/International Monetary Fund rescue package.
Soros, who made more than $1 billion shorting the pound out of the European Exchange Rate Mechanism in 1992, has been highly critical of the rescue package terms that he says Athens has no choice but to accept.
"I think it is necessary because the market interest rate is really far too high to make it possible for Greece to meet the conditions that are required of it,” he said, according to Reuters.
Soros said he believes that Germany’s insistence on an interest rate of 5 percent for the aid package has compromised the rescue because it would water down the bailout's impact.
There is a "real danger" that such a high rate would hurt Greece’s budget and threatens to drive the economy into deep recession, draining money from the governments via lower tax revenues, he claims.
“Then it becomes a vicious cycle," he said. "I would call it a death circle. That's really the danger."
Numbers ‘Changing All the Time’
Bundesbank boss Axel Weber warned German lawmakers that the rescue of Greece would end up costing 80 billion euros ($108 billion), the Wall Street Journal reported.
The man who is expected to be the next boss of the European Central Bank is worryingly reported to have said that the situation is worsening and that "the numbers are changing all the time.”
With an IMF mission attempting to get to Athens amid all the chaos caused by the Icelandic volcano and the Securities and Exchange Commission lawsuit against Goldman Sachs, the Greek story has been knocked off the front pages by the crisis.
But yields have been moving higher because the market is not buying the terms of the rescue package and yields on Greek 10-year bonds trade more than 400 basis points higher than those on the German bund.
Soros said that part of that spread will be due to speculators, but does not tell us whether his funds are shorting the euro as he talks “Death Spirals” and “Death Circles.”
What is clear is that the deal signed by euro-zone leaders just two weeks ago does not appear to have worked and the question is: what else can be done?
Soros’ comments are pretty dramatic, Peter A. Rosenstreich, chief market analyst at Advanced Currency Markets, said.
“Growth is falling, the IMF is on its way to Athens and this situation will be very difficult to get out of,” Rosenstreich told “Squawk Box Europe.”
It’s anybody’s guess who will step in and help Greece lower yields now, he said.
By the looks of things, it will not be George Soros.