Tag Archives: European Union

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.

Repeating history: The future of Greece, Europe, and the United States.

I’m rereading The Path to Tyranny to prepare it for a second printing and came across this section about Germany in the late 1920s and early 1930s (before the Nazis took over) very relevant for today:

The country’s economic problems worsened and the government approached bankruptcy. To reduce the budget deficit, the government raised unemployment insurance premiums, increased duties on wheat and barley, reduced pension and unemployment benefits, and cut the salaries of civil servants. The Social Democratic Party’s popularity declined even more when these measures pushed up unemployment even further and weakened the already fragile banking system. The government was trapped in a no-win situation. It cut back on spending to avoid bankruptcy, but this increased hardship on the people and reduced the government’s popularity. On the other hand, the government could have continued providing welfare to the people, but this would likely have forced Germany to default on its debt, which would have resulted in massive inflation and a flight of capital out of the country. The German government’s large deficits, which were the result of the economic depression combined with Germany’s already semi-socialist economy, forced Germany to decide between two equally bad choices. The resulting economic and political crisis was inevitable, regardless of what the government chose to do.

Are we in the same no-win situation today? If governments cut back on spending, this reverse-stimulus will hurt the economy and the removal of economic support will certainly increase the pain for many poor people. However, if the government continues with its deficit spending, bankruptcy will eventually occur, first in Greece which already has debt to GDP of 173%, but eventually in most if not all Western countries.

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.

In case you thought the sovereign debt crisis was over: “Portugal yields soar, underline euro worries”

The sovereign debt crisis is back! Actually, it never went away…

Portugal yields soar, underline euro worries
ECB comes off THE sidelines to buy Portuguese bonds

Proving that the euro zone’s sovereign-debt crisis is yet to be vanquished, yields on Portuguese government bonds continued to climb to levels viewed as unsustainable on Thursday, prompting the European Central Bank to intervene.

Yields on the 10-year bonds soared to a euro-era high of more than 7.6% at one point Thursday morning, according to strategists. The European Central Bank later intervened to buy Portuguese bonds, several analysts said, after staying out of the markets amid relative calm in recent weeks.

Read the rest of the article here…

Portugal ready for its bailout?

In a follow-up to yesterday’s “Ready for round three of the sovereign debt crisis?Marketwatch is covering the Portugal story. Here’s the lead:

Portugal remained in the spotlight Monday as Lisbon fought intensifying speculation that it would be forced to become the third euro-zone nation to seek a fiscal bailout due to rising borrowing costs.

News reports over the weekend and on Monday said the Portuguese government was under pressure from European Union partners to tap the rescue fund established by the EU and the International Monetary Fund in hopes such a move would quell the ongoing turmoil in European sovereign-debt markets.

Portugal has continued to insist that it won’t need aid but a key test looms on Wednesday when the government attempts to sell between 750 million and 1.25 billion euros ($936 million and $1.6 billion) of three- and nine-year bonds.

Now the part I find most relevant:

The yield on 10-year Portuguese government bonds pressed above the 7% threshold on Friday to trade around 7.14% and likely would have jumped even higher had the European Central Bank not been an apparent buyer of Portuguese bonds, analysts said.

It took Greece 16 days and Ireland 20 days to request EU/IMF aid after their 10-year yields breached the 7% level, said Gary Jenkins, head of fixed income at Evolution Securities. He noted that Portugal has been through the 7% barrier previously and then saw yields retract somewhat.

The cost of insuring Portuguese government debt against default via credit default swaps continued to rise Monday, with the spread of five-year swaps widening by 12 basis points to a record 555 basis points, according to data provider Markit.

A bailout of Portugal could be imminent. But Portugal is a small country and not likely to have any major impact. However, this will only further push Spain and Italy toward bailouts.

And let’s not forget Belgium either:

King Albert II of Belgium on Monday called on the country’s caretaker government to write a new budget in an effort to calm worries the nation will be unable to meet its budget goals, The Wall Street Journal reported. The nation has been left without a formal government since a June election due to disagreements between politicians from the Dutch-speaking north and the French-speaking south. The yield premium demanded by investors to hold 10-year Belgian debt widened by 12 basis points to around 138 basis points, or 1.38 percentage points, the report said, near record levels seen in November. The king asked current Prime Minister Yves Leterme to draft a 2011 budget with a deficit below the 4.1% of gross domestic product agreed with the European Commission last year, the report said.

Europe is a total mess, not that the US is much better. So far, everything that has been done has been stop-gap. Countries with 12 percent deficits propose reducing them to 5 percent. Countries with debt of more than 100 percent of GDP have no plan to reduce them. These countries are only proposing to reduce the rate of decline, but not stop it nor turn things around. Until I see countries with plans to reduce the size of government and balance their budgets, I will continue to worry and write about the sovereign debt crisis and the economic doom it will cause if not addressed.

Ready for round three of the sovereign debt crisis?

First came Greece. Next was Ireland. Next up may be Portugal.

Portugal under pressure to seek EU/IMF aid

Pressure is growing on Portugal from Germany, France and other euro zone countries to seek financial help from the EU and IMF to stop the bloc’s debt crisis from spreading, a senior euro zone source said on Sunday.

Some preliminary discussions on the possibility of Portugal asking for help if its financing costs on markets become too high have taken place since July, the source said.

No formal talks on aid have started yet, a number of euro zone sources said, but the pressure was rising in the Eurogroup, which brings together euro zone finance ministers.

“France and Germany have indicated in the context of the Eurogroup that Portugal should apply for help sooner rather than later,” the senior source said, adding Finland and the Netherlands had expressed similar views.

The article continues that Portugal and Germany are denying all the above, but then points out that this was the case before Ireland got its bailout. The article then returns to reality.

The growing pressure on Lisbon follows a sharp rise in Portuguese 10-year bond yields at the end of last week to euro lifetime highs above 7 percent, as investors worried about the prospect of up to 1.25 billion euros of bond supply it will offer at an auction on Wednesday.

The yield of five-year Portuguese bonds on the secondary market is 6.43 percent and 10-year paper trades at 7.26 percent. Economists say a key question for Portugal is how long it can sustain the high yield levels, and the auction will be an important gauge of that.

Portugal and the EU can fight reality for only so long. In all likelihood, the bond market will force Portugal to get help. And then it will force Spain and Italy to do so. Belgium may also need help if they can’t form a government. With the at-risk economies slowing due to austerity and countries like Germany and France giving free money to them, even those countries will be in economic trouble.

How long will Germany and France give away their money to others instead of saving it for themselves? How much longer will the Euro last?

The sovereign debt crisis continue, but the MSM is keeping it a secret.

You really have to dig to find information about the continuing sovereign debt crisis in Europe. The only article on the subject I saw on Marketwatch, a large financial website, had the story buried within a piece about the U.S. Dollar:

Renewed pressure on bonds in the euro-zone periphery, as well as pressure on Belgian debt, helped drag down the single currency, strategists said. Fears that rising borrowing costs could force Portugal to seek a bailout were renewed as Lisbon outlined plans Thursday to tap credit markets next week.

Proposals to potentially require senior debtholders to take write-downs in the event of future bank crises also led to a selloff in peripheral bonds, pushing higher bond yields and the cost to insure the debt.

Even Greek bonds are still falling, with the premium investors demand to own them instead of German bonds hit a fresh intraday high, according to Dow Jones Newswires.

I searched and couldn’t find any details at The Wall Street Journal.

Thankfully, Bloomberg has the story:

Portuguese Bonds Lead Peripheral Euro-Area Decline Amid Looming Auctions

Portuguese government bonds led declines by securities from the euro-region’s most indebted nations amid concern demand at auctions next week may flag.

Spanish 10-year bonds fell, driving the extra yield investors demand to hold the securities instead of similar- maturity German bunds to the highest in more than a month. The European Union proposed yesterday that bank regulators be granted powers to write down debt in future crises. Belgian debt dropped amid a political impasse. German notes were little changed after the U.S. added fewer jobs than analysts estimated.

The yield on Portuguese 10-year bonds rose 16 basis points, after a 27 basis-point increase yesterday, to 7.34 percent at 4:24 p.m. in London. The 4.8 percent security maturing in June 2020 fell 0.955, or 9.55 euros per 1,000-euro ($1,295) face amount, to 83.10. The yield is up 33 basis points since Dec. 30.

The cost of insuring against default on European government debt, measured by the Markit iTraxx SovX Western Europe Index, increased four basis points to a record 217. Contracts on Portugal rose 10 basis points to 535, the highest level since Nov. 30, according to CMA. Spain increased 4.5 basis points to 353, Italy climbed 9 to 251, and Belgium reached a record 249.

Spanish 10-year yields climbed three basis points to 5.52 percent. The yield premium to bunds increased to 263 basis points, after reaching 264 basis points, the most since Dec. 1.

Italian 10-year bond yields rose four basis point to 4.82 percent, with Irish yields increasing six basis points to 9.25 percent.

In case you thought the sovereign debt crisis was over, just the opposite. We are still in the early stages of it.

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.

Currency devaluation’s effect on the markets and the importance of diversification

With commodities rallying across the board this year (most are up between 20% and 100%), copper is at an all-time high, palladium at a 10-year high, oil near its two-year highs, and the Treasuries falling, traders are obviously look for real assets.

The realest assets are commodities, but behind those are shares in companies that produce real goods and earn real profits. We tend to look at those profits in Dollar terms, but they really aren’t. A company making a 10% margin is making a 10% margin in the goods it sells, not in Dollars. In other words, a company could sell 90% of its goods to breakeven and hold the other 10% of the goods produced as profit instead of converting it into Dollars. Or that extra 10% could be converted into gold, silver, or whatever it wants, as long as it has a place to store the profits. Therefore, as long as a company continues to sell, the devaluation of currencies should affect it less than non-performing assets, such as Treasuries which will get hit by rising interest rates and inflation.

Actually, stocks tend to do well during periods of inflation, as long as the economy does well too. If a company’s costs rise, it simply passes along all or most of that to its customers. So if costs rise 10%, a company raises its selling price by the same amount to maintain its margin. As long as all countries experience the same inflation, there will little effect on the company. If we are seeing a worldwide currency devaluation, as I believe, stocks should rise as long as the economy holds up. Of course, commodities will likely do best, but stocks won’t be far behind. They’ll continue to earn a real rate of return of 4% to 7% or so. Bonds though will get double hit by rising interest rates and devaluation. Buying a bond yielding 4% today will yield a negative return if inflation exceeds that amount. And rising interest rates will reduce the Present Value of the bond too.

I would add a major caveat to all this: there is a chance of a major economic decline. With government’s deep in debt and many cutting back, the economy could suffer. Whether we see sub-par growth for the next generation or a double-dip recession remains to be seen. But if this economic decline occurs, stocks will get hit, of course. Commodities will also fall. Industrial commodities, such as copper and oil, may do even worse than stocks while precious metals will hold up better, but they too are likely to decline as they did during the 2008 market crash.

I’m not an economic adviser, but I always recommend diversification. Unless you have a lot of time to spend analyzing the market and become very good at it, chances are you won’t be able to “beat the market.” In fact, even the experts have a hard doing so and, statistically speaking, it has not been proven that anybody can beat the market (those that appear to do so may just be black swans). So own some stocks, some bonds, some commodities, and hold some cash. How much in each depends on your age and risk tolerance. You will not make a killing by diversifying, but in this political and economic environment, protecting your money is paramount. And with the future so uncertain, diversification is the only way to be sure your wealth won’t disappear in a market crash or rally, if governments go bankrupt or become solvent, or if the economy strengthens or weakens. No single investment will perform well in all the possible situations. Remember gold’s decline in 2008 or the larger decline from 1981 to 1998. Cash could be eaten up by inflation. Treasuries by rising interest rates. Stocks by an economic decline. But it is very unlikely that all four will decline together.

For example, learn more about Harry Browne’s Permanent Portfolio. I don’t necessarily recommend his portfolio as is. Much depends on your age and risk tolerance and ability to purchase these funds/instruments. But it certainly gives you a clearer picture of the importance of diversification.