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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.

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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

Sovereign debt crisis worsening. Governments paralyzed. Solution too hard to swallow.

Despite all the governments’ efforts, or maybe because of them, the sovereign debt crisis is only getting worse. Marketwatch reports:

The euro zone’s sovereign-debt crisis intensified Tuesday, with yields on Spanish, Italian and other peripheral government bonds soaring in the wake of a weekend meeting of European Union finance ministers that failed to soothe fears of the potential for future defaults.

The yield on 10-year Spanish government bonds jumped to around 5.63%, strategists said, a day after surging to 5.43%.

The move sent the yield premium demanded by investors to hold 10-year Spanish debt over comparable German bunds to more than three full percentage points.

“Ireland’s bailout did nothing to ease the euro-zone debt crisis: it might have even made it worse,” said Steven Barrow, currency and fixed-income strategist at Standard Bank. “For now the market sees a pattern emerging and the next piece of the bailout puzzle seems to be Portugal, with Spain to follow after that.”

The yield on 10-year Italian bonds also rose for a second day to hit 4.77% from around 4.64% on Monday. Portuguese, Greek and Irish bond yields also rose. And outside the periphery, the Belgian 10-year bond yield continued to climb, hitting 3.97% versus around 3.86% on Monday.

How long before Europe realizes that bailing out the banks, announcing plans to cut their deficits to 3 percent in four years time, and getting bailouts from EU and IMF will not work? The sovereign debt crisis will continue until these European countries announce balanced budgets effective immediately (2011) or, at the worst case, next year (2012) and that they will never again bail out the banks. They also have to leave the Euro, which is partly responsible for the mess to start with.

Unfortunately, I doubt the European governments will implement these measures. And if they were to do so, the people would be in full revolution. The only easy way out I see is if the economy suddenly stages a huge recovery. Barring that, it looks like things will be getting worse, possibly much worse.

Ireland gets its bailout. You ain’t seen nothing yet!

So Ireland finally got its bailout. I discuss the true cost of the bailout here and how this is only a temporary solution here.

Focus has now shifted to Portugal and Spain. Ireland is a country with just 4.5 million people, whereas Portugal has 11.3 million and Spain has 46.0 million. People are now guessing at how big their bailout will be if they are needed.

According to The Telegraph:

Analysts estimate that a Portuguese bail-out might require less than euro 50 billion, less than the sum lent to Greece or Ireland. But rescuing Spain from crisis would require a much bigger sum.

Cornelia Meyer, CEO & Chairman, MRL Corporation, told CNBC Monday:

She predicted that a Spanish bailout would likely cost up to 500 billion euros; but there is no “real mechanism” to deal with it, Meyer added.

While a bailout of Portugal would likely be small, a bailout of Spain would be five times greater than that of Ireland.

One thing analysts are forgetting is that the PIIGS also includes Italy. If Italy, with it 60.4 million people, needs a bailout, it could eclipse Spain’s total. Nobody is talking about bailout for Italy, but nobody was talking about bailouts for Spain and Portugal just months ago. If Spain and Portugal take bailouts, focus will then shift to Italy.

If all five PIIGS need bailouts, we are talking about well over a trillion Euros. Good thing money grows on trees.

If this story sounds familiar, it should. It is eerily similar to the US banking crisis in 2008. First Bear Stearns went bankrupt. An isolated case. Then Lehman Brothers. OK, a second special situation. Next was AIG. Then Citigroup, Wells Fargo, Bank of America, and the rest suddenly needed help from the government. BofA, Wells Fargo, etc. may not have been in real trouble when the whole thing started. Instead, it was an old fashion bank run where depositors/investors get their money back because they don’t trust the banks and banking system. Now we are seeing the same thing in Europe. Ireland didn’t need a bailout… until last week when depositors withdrew billions of dollars from Irish banks. Today, Spain, Portugal, and Italy may not be in trouble, but if people start thinking they are “at risk,” they’ll withdraw their funds and it will become a self-fulfilling prophecy.

And all the bailouts in the world won’t end this madness until these countries get their fiscal and monetary houses in order. Until then, the sovereign debt crisis will spread from one country to another.