Tag Archives: spain

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.

There is something rotten in the state of Greece. Also in Ireland, Portugal, Spain, and Italy.

Europe is patting itself on the back as they supposedly work out a fix for Greece. Basically, Greece will get billions more Euros in exchange for spending cuts. As a result, Greek interest rates fell slightly, though they are still very very high.

Greece 10-year interest rate:

Greece 2-year interest rate:

Great job Greece and Europe! The 10-year interest rate in Greece is now only 16.81%. And the 2-year rate is down to 29.38%. A job well done, indeed!

But wait a second there Europe. Don’t drink your champagne just yet. What about the rest of Europe?

Ireland 10-year interest rate:

Portugal 10-year interest rate:

Spain 10-year interest rate:

Italy 10-year interest rate:

Very puzzling. Why are those interest rates rising to record highs if you solved the problem? I’m starting to think you don’t know what you’re doing.

Sovereign debt crisis update: Yields hitting new highs in Greece, Ireland, Portugal, and Italy.

Interest rates are hitting their highest levels since the euro zone was created. Here are the five most “at-risk” countries, in order of chances of default.

Greece

 

Ireland

 

Portugal

 

Spain

 

Italy

Sovereign debt crisis: Here we go again.

Moody’s cuts Greece rating, stokes debt fears:

Moody’s Investors Service cut Greece’s sovereign-debt rating Monday by three notches to B1, infuriating the Greek government and temporarily denting the euro amid renewed worries about the ability of Greece and other debt-loaded euro-zone governments to avoid default.

The ratings agency, which also assigned a negative outlook to Greece’s ratings, highlighted the government’s difficulties with revenue collection and noted a risk that Athens might not meet the criteria for continued support from the International Monetary Fund and the European Union after 2013.

That could result in a voluntary restructuring of existing debt, the ratings agency said.

[…] The spread on Greek five-year credit default swaps widened 27 basis points to 1,010 basis points, according to data provider Markit. A basis point is 1/100th of a percentage point.

That means it would cost $1.01 million annually to insure $10 million of Greek debt against default for five years, up from $983,000 on Friday.

[…] The yield on Greek 10-year government bonds rose to 12.12% Friday, moving back above the 12% level for the first time since January, Jenkins noted, while the two-year spread had hit 15.22%.

It’s not just Greek yields that are rising. Portugal’s 10-year yield is hitting new highs. Many suspect that Portugal will be the next domino to fall, followed by Spain, and then Italy. Italy’s yield is also hitting new highs.

And the sovereign debt crisis continues, just as I’ve been saying it would

China to bail out Spain. Good or bad?

I previously wrote that “China has surpassed the United States as the lender of last resort.” Now, there is more evidence for this:

China is confident Spain will recover from its economic crisis and Beijing will buy Spanish public debt despite market fears of an Irish-style bailout, a top Chinese official said Monday.

The comments by Vice Premier Li Keqiang were made in an op-ed piece in Spain’s leading daily El Pais one day ahead of his arrival in Madrid for a three-day official visit, the start of a European tour that will also include Britain and Germany.

“Since China is a responsible investor country in the long-term on the European financial markets, and in particular in Spain, we have confidence in the Spanish financial market, which has been translated into the acquisition of its public debt, something we will continue to do in the future,” he said.

“China supports the measures adopted by Spain for its economic and financial readjustment, with the firm conviction that it will achieve a general economic recovery”, said Li, who is widely tipped to become China’s next premier.

It remains to be seen if this is good or bad. If China acts responsibly and withdraws their support if Spain fails to hold to their austerity measures, China is simply helping Spain avoid steps necessary to fix its mess and encouraging other countries to act irresponsibly too. But if China really forces Spain to cut back on its deficit spending, this could provide Spain the temporary support it needs to get its fiscal situation back on track.

My major concern is that China is still controlled by a ruling class that has its own interests in mind more than the economic well-being of the Spanish. China would hate to see the world economy decline and has every reason to prop it up. China figures that every year it can grow faster than the rest of the world, it becomes all that much more important and powerful. A collapse in the worldwide economy now would take China down with it before the country has a chance to flex its muscles. China would rather prop up the world for another ten years, by which time its power will have grown immensely.

Or I could be over-analyzing things. China could be making an investment and, if correct, a very profitable one. But with China’s secretive government, one never knows what they are really thinking.

Europe burns! CDS imply 7 to 11 notch credit downgrades. Belgium and France to join the sovereign debt crisis?

First Greece. Then Ireland. Next may be Portugal and Spain. Some are talking about Italy as well. As the sovereign debt crisis spreads through Europe, it is working its way up the food chain. Now, some are talking about Belgium and France too:

France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut.

Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Costs to insure French government debt rose to a record today with the country’s credit default swaps more expensive than lower-rated securities from the Czech Republic and Chile.

Costs to insure French government debt trebled this year, reaching an all-time high of 105.5 today, according to data provider CMA. Credit default swaps tied to Czech securities were little changed at 90 basis points and Chilean swaps ended last week at 89.

The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.

Contracts on Portugal imply a B2 rating, 10 levels below its A1 grade, while swaps tied to Spanish bonds trade at Ba3, 11 steps below its Aa1 ranking, data from the Moody’s research group show. Derivatives protecting Belgian debt imply a rating of Ba1, nine steps below its current rating of Aa1.

This is eerily familiar. The credit rating agencies gave overly optimistic ratings to collateralized mortgage obligations (portfolios of mortgages) and were then slow to downgrade them. Now, they are making the same mistake on an international level.

What do you think would happen if the credit rating agencies recognized reality and downgraded these countries to where the market believes they should be? The markets would crash. That’s why they are avoiding the painful truth.

However, the credit rating agencies and governments can only deny reality for so long. Eventually, they will have to recognize the truth. The market will force the credit rating agencies to downgrade sovereign debt whether they want to or not. The market will force countries to restructure their welfare state systems or force them into bankruptcy.

I pray that this is done sooner rather than later. It will be painful. Extremely painful. There will be riots in the street as we are already seeing. But it is better to bear the cost now when the situation is still manageable, just barely so, than when all chances of saving western civilization are gone and nations descend into anarchy and tyranny.