Anybody who thought the sovereign debt crisis was over, it is now time to wake up. Irish credit default swaps hit a new record today!
Irish government bond yields rose and the cost of insuring sovereign debt against default jumped Friday due to ongoing jitters over the cost of bailing out Ireland’s troubled banking sector.
Analysts tied the weakness in part to a research note published Thursday by Barclays Capital warning that the Irish government could eventually be forced to seek outside help from the International Monetary Fund and European Union if the fiscal situation proves worse than expected.
The spread on five-year Irish sovereign credit default swaps hit 433 basis points, up from 387 basis points on Thursday — soaring to the widest level on record, according to data provider Markit. That means it would now cost $433,000 a year to insure $10 million of government debt against default, up $36,000 from Thursday.
For months, the various world governments and mainstream media told us that the debt crisis was over. Why? Because countries such as Greece, Spain, Portugal, and Ireland would reduce their budget deficits. Not eliminate them, just reduce them.
Portugal posted a deficit of 9.3 percent of gross domestic product in 2009, the fourth-highest in the 16-country euro region. The government aims to narrow the deficit to 7.3 percent this year and intends to meet the EU’s 3 percent limit in 2012.
Yes, a 3 percent deficit is preferable to a 9.3 percent deficit, but with debt of 75 percent of GDP as of 2009 (much higher now), they are only switching from a quick death to a slow one. Besides, their deficit target is based on assumptions of a growing economy. What if the economy does not grow? The deficit will be wider than expected and their debt problem will get even worse.
Zapatero has imposed tough austerity programmes, aiming to slash the budget deficit to 3 percent of gross domestic product by 2013 from 11.2 percent last year.
Again, 3 percent is better than 11.2 percent, but the slow bleed continues. They are simply putting a band-aid on a broken arm.
The government plans to cut the budget deficit to 8.1 percent of gross domestic product this year from 13.6 percent last year.
Again, I’m unimpressed. Greece’s debt is already 113 percent of GDP. Is there any way to recover from that besides running budget surpluses, which would require sharp cutback in government services?
Analysts say this year’s budget deficit could reach around 25 percent of gross domestic product (GDP) including the one-off costs associated with bank bailouts.
Even without the one-off bank bill, the shortfall is still expected to be around 10 percent next year on an underlying basis, over three times an EU limit of 3 percent, according to the latest Reuters poll.
Are you serious? A 25 percent deficit is possible this year? And an “improvement” to 10 percent next year?
By the way, the situation in the United States is not much better. This year’s deficit is expected to be 10.6 percent of GDP. Next year’s: 8.3 percent. Eventually, if all things go according to plan, which they never do, the deficit will fall to 3.9 percent of GDP. Not much better than those failing European countries.
And the government/mainstream media is trying to convince us that there is nothing to worry about. Gold is looking more and more attractive every day.