'Nostradamus' Juncker and Germany's Political Quandary

The current head of the euro-group, Jean-Claude Juncker, last week painted a stark picture of the euro area's future if the Greek debt can were not successfully kicked down the road one more time. Evidently, calming the markets cannot have been the goal of these apocalyptic pronouncements, which included a reminder that Italy and Belgium could be the next countries in the market's line of fire.

According to the AP :

that demanding that private creditors contribute to the next Greek bailout package could be considered a "default" by ratings agencies – and that would have extreme consequences for Europe as a whole.

Juncker, the prime minister of Luxembourg who also chairs the 17 eurozone finance ministers, was quoted as saying that a Greek bankruptcy "could prove contagious for Portugal and Ireland, and then also for Belgium and Italy because of their high debt burden, even before Spain."

"We are playing with the fire," he told the paper.

His comments came a day after Moody's warned it may reduce Italy's Aa2 credit rating over concerns about the country's ability to increase growth and reduce its public debt, one of the highest in Europe. The warning followed a similar move by Standard and Poor's, which cut its ratings outlook for Italy's debt from stable to negative.

On Friday, German Chancellor Angela Merkel softened her government's insistence on having private creditors share part of the Greek burden following a meeting with French President Nicolas Sarkozy in Berlin, with both leaders agreeing that the participation should be "voluntary." Ratings agencies as well as the European Central Bank have warned that forcing bond holders to accept losses or give Greece extra years to repay its debt would likely be considered a partial default by Greece that could spread panic on financial markets. Juncker stressed that a debt restructuring would ravage Greek banks, which hold a large amount of their country's debt – some euro80 billion ($114 billion) – ultimately requiring yet another bailout for the banks.

"Everything is becoming yet more expensive because we are including private creditors due to domestic political considerations in Germany," Sueddeutsche Zeitung

Indeed, Nostradamus Juncker has a point about Italy.