Morgan Stanley's Peters sees Spain risk

The European debt crisis cannot be reined in until Greece restructures its debt, something it must do this year, a veteran bond analyst said on Monday.

Even so, Spain, as the most sizable European sovereign debt market that has recently come under pressure, is the euro zone's biggest risk, said Greg Peters, global head of fixed income and economic research with Morgan Stanley.

A resolution of what Peters said is a persistent European sovereign debt crisis depends on Greece's reworking of its debt, he told the Reuters Investment Outlook Summit in New York.

"There's really no quick solution" he said. The European crisis "will not slow down or abate until Greece is forced to restructure."

Greece is "basically socializing the problem and dragging everyone else down with them" he said, adding that Greece could restructure by the end of the year.

But ultimately, Peters said, Spain is what matters. He also said he is concerned about France.

Spain "has been the linchpin" he said. Greece and Portugal "don't matter as much in the scheme of things. Spain does."

Peters said his ultimate concern is that the European crisis could spread to Britain and possibly the United States.

"Really, what I worry about most is the sovereign debt crisis becoming a rolling crisis and hitting the shores of the UK and the United States" he said.

The Spanish government may be able to impose fiscal austerity measures effectively, he said. So far, Spanish banks have been able to obtain funding fairly smoothly in short-term lending markets, albeit at higher rates, he added.

Fitch Ratings last month cut Spain's AAA rating by one level to AA-plus, after Standard & Poor's in April cut Spain's by one notch to AA, the third highest rating.

In the United States, so far, "the markets are giving the United States somewhat of a free pass about its fiscal woes" he said. "Chances are the United States will get enough time to demonstrate a plan."

Regarding U.S. economic growth, Peters said the country is likely to undergo a slow, sustainable recovery. The Federal Reserve is likely to keep rates steady and not raise interest rates until late 2011, he said.

Peters also agreed with recent comments by the president of the Kansas City Federal Reserve Bank, Thomas Hoenig, and Hoenig's bold call for the U.S. central bank to raise its key interest rates to 1 percent by the end of the summer. Hoenig said 1 percent would still be accommodative.

"I have a lot of sympathy for that argument" Peters said. "I am obviously not a ruling member but that's my view, personally. But I think the market would be freaked out by that."

Although riskier assets, including U.S. corporate bonds, have come under pressure from investors nervous about global risks from Europe's sovereign debt crisis, Peters said he is bullish about both investment-grade and high-yield corporate bonds.