Tag Archives: debt crisis

UPDATE: Europe is paying for its past excesses: European interest payments as % of GDP.

With news out today of a weak German bond auction and troubles with the Dexia bailout, I thought it time to update my table of European interest payments as % of GDP. But first, the news:

  • Germany auctioned 6 billion euros of 10-year government bonds, but attracted just 3.889 billion euros of bids, a bid-to-cover ratio of just 0.65. Six of the last eight bond auctions have seen bids below supply. In these cases, the Bundesbank has bought the remaining debt. German yields are rising as a result. Germany’s 2-year yield is up 0.06% to 0.44% and 10-year yield is up 0.13% to 2.12%.
  • Belgian yields are soaring to new highs on reports that the bailout of Dexia was failing. Belgium’s two-year yield rose 0.69% to 4.98% and 10-year yield increased 0.40% to 5.47%. In France, also a partner to the Dexia bailout, the 2-year yield rose 0.14% to 1.86% and the 10-year yield jumped 0.15% to 3.68%.
  • No news other than the above is pushing up rates across most of Europe. Greece’s 1-year yield skyrocketed 38.6% to 306.7%. The 2-year rate jumped 4.6% to 117.9% and the 10-year year yield rose 0.18% to 29.04%. All are record highs. Over in Italy, 2-year yields rose 0.17% to 7.15% and 10-year yields increased 0.15% to 6.97%.

So now, let’s see an updated table of where Europe stands in its ability to pay the interest on its debts.

 

2-year interest rate

Debt-to-GDP

Interest payment %age of GDP

Change in Interest payment

Greece

117.88%

144.9%

170.8%

+14.4%

Portugal

14.62%

83.2%

12.2%

-3.1%

Italy

7.11%

118.1%

8.4%

-0.1%

Ireland

9.96%

64.8%

6.5%

+0.5%

Belgium

4.94%

96.6%

4.8%

+1.9%

Spain

5.82%

63.4%

3.7%

+0.8%

France

1.88%

83.5%

1.6%

+0.5%

Germany

0.45%

78.8%

0.4%

+0.1%

Great Britain

0.47%

62.6%

0.3%

———

United States

0.26%

99.7%

0.3%

———

As you can see on the above table, only Portugal had a significant decrease in interest payments going forward. In contrast, Greece, Ireland, Belgium, Spain, and France all say significant increases. Whereas previously, only four countries had interest going forward exceeding 3 percent of GDP, six nations now face that situation.

Clearly, as anybody watching the stock market decline here knows, the European debt crisis is getting worse and the European leaders have yet to find a solution. Unfortunately, with the budget mess in Washington and debt-to-GDP ratio of about 100%, higher than most of those “risky” European nations, the United States will soon be facing the same problem.

Europe is paying for its past excesses: European interest payments as % of GDP.

With interest rates rising in Europe and heavy debt-to-GDP ratios, I decided to look at how much interest each European country must pay going forward as a percentage of its economic output. I threw in the United States for fun. (Table sorted by interest payment %age of GDP.)

 

2-year interest rate

Debt-to-GDP

Interest payment %age of GDP

Greece

107.97%

144.9%

156.4%

Portugal

18.40%

83.2%

15.3%

Italy

7.20%

118.1%

8.5%

Ireland

9.16%

64.8%

5.9%

Belgium

3.00%

96.6%

2.9%

Spain

4.56%

63.4%

2.9%

France

1.33%

83.5%

1.1%

Great Britain

0.52%

62.6%

0.3%

Germany

0.35%

78.8%

0.3%

United States

0.23%

99.7%

0.2%

Now, these debt figures account only for federal government spending. Many countries, most notably the United States, also has state, provincial, and local governments with their own debts. Additionally, many of the debt-to-GDP estimates are from 2010. Thus, most of the above countries have debt-to-GDP ratios and interest expenses even worse than calculated above.

Clearly, we can see why Greece is in trouble. If it were to refinance its debt at market rates (it has been refinancing through Euro-zone subsidized loans), its interest payments would exceed its GDP by a half.

Italy is also paying for its problems. So far, Italy has received no help from any bailout fund and, as of now, will have to refinance its debt at market rates. As such, it will cost Italy 8.5% of its GDP to do so. If it had a more reasonable debt level and interest rates, say those of France, Italy would have an additional 7.4% of GDP to spend or save.

Most surprising is how everybody is ignoring Portugal. Portugal has already received bailout funds, but that won’t last forever. If Portugal were to return to normal by accessing the market, interest payments would eat up 15.3% of its GDP. That’s a lot to pay for past mistakes.

Belgium is another sleeper. It’s problems are just as bad as Spain’s, yet nobody is talking about them. Furthermore, Belgium has not been able to form a ruling coalition since elections were last held on June 13, 2010, breaking all records. Furthermore, the New Flemish Alliance party is Belgium’s largest political party with 17% of the vote. This party favors the “peaceful and gradual secession of Flanders from Belgium.” Lots of problems there, but nobody seems to be talking about it.

So far, Europe has paid for the mistakes of Greece, Portugal, and Ireland. However, Italy’s debt is 2.7 times the combined debt of those three nations that are already receiving bailout funds. That makes Italy both too big to fail and too big to bail out.

Europe is facing problems on multiple fronts: Greece, Italy, Portugal, Ireland, Belgium, and Spain, to name a few. So far, Europe has successfully staved off depression by bailing out the smaller, weaker countries. But as the problem spreads to more countries, and bigger ones at that, Europe is running out of room and options.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.

Usurping the Constitution to avoid default?

A number of political pundits, legal experts, and even government officials argue that President Barack Obama should use the 14th Amendment to circumvent the debt ceiling and avoid default. The New York Times reports:

A few days ago, former President Bill Clinton identified a constitutional escape hatch should President Obama and Congress fail to come to terms on a deficit reduction plan before the government hits its borrowing ceiling.

He pointed to an obscure provision in the 14th Amendment, saying he would unilaterally invoke it “without hesitation” to raise the debt ceiling, “and force the courts to stop me.”

On Friday, Mr. Obama rejected the idea, though not in categorical terms.

“I have talked to my lawyers,” Mr. Obama said. “They are not persuaded that that is a winning argument.”

Despite President Obama’s resistance to this idea, some House Democrats are pushing it. Politico reports:

Rep. James Clyburn and a group of House Democrats are urging President Barack Obama to invoke the 14th Amendment to raise the debt ceiling if Congress can’t come up with a satisfactory plan before the Tuesday deadline.

Clyburn, the third-ranking House Democrat, said Wednesday that if the president is delivered a bill to raise the debt ceiling for only a short period of time, he should instead veto it and turn to the phrase in the Constitution that says the validity of the U.S. government’s debt “shall not be questioned.”

According to the New York Times article, “Jack M. Balkin, a law professor at Yale” argues:

“This is largely a political question,” he said. “It is unlikely courts would decide these questions.”

“At the point at which the economy is melting down, who cares what the Supreme Court is going to say?” Professor Balkin said. “It’s the president’s duty to save the Republic.”

Similarly, Eugene Robinson writes at the Washington Post:

It seems to me that definitive action — unilateral, if necessary — to prevent the nation from suffering obvious, imminent, grievous harm is one of the duties any president must perform. Perhaps the most important duty.

This seems all too familiar because it comes straight out of history. In ancient Rome, Sulla was given dictatorial power to restore the republic. By violating Rome’s constitution, Sulla and the Senators that gave him power established a precedent that enabled Julius Caesar to become dictator for life and destroy the republic. Similarly, men like Benito Mussolini and Adolf Hitler also rose to power and expanded their control under the guise of saving the nation.

The Founding Fathers, being students of history, knew that extra-constitutional actions would only undermine the republic in the name of restoring it. As George Washington explained in his farewell address:

If, in the opinion of the people, the distribution or modification of the constitutional powers be in any particular wrong, let it be corrected by an amendment in the way which the Constitution designates. But let there be no change by usurpation; for though this, in one instance, may be the instrument of good, it is the customary weapon by which free governments are destroyed.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July and is now available in stores.

Bull-market highs but still much to fear!

The Dow Industrial and S&P 500 hit new bull-market high yesterday. Clearly, the sovereign debt crisis in Europe is over and there is nothing worry about. Or is there?

Standard & Poor’s Ratings Services on Wednesday cut its long-term rating on Ireland to A-minus from A and lowered its short-term rating to A-2 from A-1. The agency said the ratings remain on CreditWatch with negative implications, where they were placed on Nov. 23. The move comes in the wake of S&P’s revised assessment of risks tied to the Irish banking industry. “Were the labor market to deteriorate further, a rise in the level of delinquencies in the domestic banks’ mortgage books could result in higher new capital requirements than we presently assume,” said S&P analyst Frank Gill. The emergence of a European framework for restructuring sovereign debt could trigger a reconsideration of Ireland’s creditworthiness, he said. The resolution of Ireland’s CreditWatch listing will likely leave the government’s ratings in an investment-grade category, Gill said. The CreditWatch placement is expected to be resolved by April, the agency said.

The recent modest improvement in the world economy has bought these “at-risk” countries some time to fix their books, but little progress has been made. Furthermore, those countries that have been applying austerity measures have not seen the economic gains others have. For example:

The UK economy shrank by a shock 0.5% in the last quarter of 2010 as Britain’s recovery from recession faltered.

Most of the unexpected contraction was caused by the wintry weather that gripped Britain last month, the Office for National Statistics said. Without it, GDP would probably have been flat – suggesting that the UK economy had already run out of steam before the snow hit.

Economists said the first estimate of GDP for the last quarter was much worse than expected, and meant that Britain could now suffer a double-dip recession. With inflation hitting 3.7% last month, there are also growing fears the UK is heading for an unpleasant dose of “stagflation”.

The eagerly awaited GDP figures put the government’s austerity programme under fresh scrutiny, with Labour again arguing that cuts are being made too deeply, and too rapidly.

Now, economists and politicians are arguing the merits and demerits of austerity. They still have not realized they are damned if they do and damned if they don’t. If they continue to run big deficits, interest rates will rise and the country will be forced to default, send the country into economic and political chaos. If they impose austerity measure, it will certainly hurt the economy, but the country will survive.

Austerity is a painful, but necessary medicine. Politicians would rather take the placebo.

Head of European Commission warns we are back on the path to tyranny

The UK”s Daily Mail reports:

Democracy could ‘collapse’ in Greece, Spain and Portugal unless urgent action is taken to tackle the debt crisis, the head of the European Commission has warned.

In an extraordinary briefing to trade union chiefs last week, Commission President Jose Manuel Barroso set out an ‘apocalyptic’ vision in which crisis-hit countries in southern Europe could fall victim to military coups or popular uprisings as interest rates soar and public services collapse because their governments run out of money.

Meanwhile, the head of the European Trade Union Confederation said:

This is 1931, we’re heading back to the 1930s, with the Great Depression and we ended up with militarist dictatorship. I’m not saying we’re there yet, but it’s potentially very serious, not just economically, but politically as well.

After World War II, just about everybody swore off fascism, even though it continued to exist, most notably in Spain and Argentina. After the fall of the Soviet Union, the world said the same thing about communism. But Friedrich Hayek warned us in the 1956 preface to The Road to Serfdom:

Though hot socialism is probably a thing of the past, some of its conceptions have penetrated far too deeply in the whole structure of current thought to justify complacency.

Not only have we seen outright socialism reappear in places like Venezuela and Bolivia, it slowly took over Europe and the United States so that government now accounts for 47% of the European economy and 43% in the US.

Now we face a challenge similar to the one we faced in the 1920s and 1930s. Will we embrace totalitarianism and its false promises of effective government, cradle-to-grave support, and national rebirth as Germany, Italy, and the Soviet Union did? Or will we re-embrace liberty, economic freedom, and personal responsibility that our Founding Fathers gave us and resulted in the freest and wealthiest society the world had ever seen?