Tag Archives: Politics of Greece

Sovereign debt crisis hits record levels. Preview of United States?

A quick look at the charts shows the sovereign debt crisis has hit record levels along with European interest rates:

Greece 10-year yield:

Ireland 10-year yield:

Portugal 10-year yield:

With 10-year interest rates up at 14.9, 10.5, and 9.5 percent (and two-year rates even higher in many cases), it is hard to see how these countries can afford to pay these rates. If the United States were paying a 10% interest rate with debt about 90 percent of GDP, 9 percent of GDP and about a third of federal spending would go just to paying interest on the debt. In Greece, where debt is about 130 percent of GDP, the government is spending about 19.4 percent of GDP on interest. This is clearly unsustainable, which is why everybody expects these countries to “restructure” their debts, a euphemism for defaulting and paying back less than they owe. This expectation is a self-fulfilling prophecy because it pushes rates even higher.

With the situation in the United States only marginally better, how long before rates rise here and the U.S. defaults? Best to cut spending now, when we have a choice, than later when interest rates rise and the government has to divert spending to interest payments.

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Irish bond premiums higher than Greece’s before its bailout. Sovereign debt crisis continues.

Lost in all the news of the election and quantitative easing, the sovereign debt crisis is getting worse. Marketwatch reports:

Investors are dumping bonds in Ireland and Greece in a reprise of the sovereign debt crisis that shook global markets six months ago, as political infighting threatens to stymie budget reforms in the most debt-strapped countries.

On Tuesday, Irish credit costs surged to a record high and bond prices tumbled, after the reported resignation of Jim McDaid, a member of parliament for Ireland’s Fianna Fail party, added to worries the government would fail to muster the votes for planned spending cuts and tax hikes totalling 15 billion euros ($21 billion.)

Credit-default spreads for Irish sovereign debt jumped 22 basis points to 5.20 percentage points, and hit 5.30 percentage points, a record high, said Markit. The gain means it costs about $520,000 a year to buy five years of default insurance for $10 million in Irish government debt.

The surge in Irish credit fears was echoed in higher costs to buy protection on debt of other so-called “PIIGS” countries. Greek CDS widened 15 basis points to 8.45 percentage points, while Portuguese CDS gained 8 basis points to 4.02 percentage points. One basis point is 1/100 of a percentage point.

Ireland’s 10-year bonds tumbled, sending yields up 19 basis points to 7.17% and further widening the gap with benchmark German bonds, which yielded 2.47%.

Yields on 10-year Greek government bonds surged 10 basis points to 10.67%. Selloffs in Greek and Portuguese debt were in full force last week when their governments’ own budget initiatives came into doubt.

Bloomberg takes a more dismal outlook of the situation:

Irish Finance Minister Brian Lenihan may have just one month to stave off an international bailout.

The extra yield that investors demand to hold Irish 10-year bonds over German bunds surged to a record today as Lenihan tries to put together a 2011 budget by Dec. 7 that convinces investors he can get the country’s finances in order.

The premium on Irish bonds has doubled since August and is now wider than the spread on Greek debt four days before it sought a European Union-led bailout in April. That’s putting pressure on Lenihan to cut the deficit and overcome both an economic slump and the rising cost of bailing out the country’s banks.

This is huge, but nobody is talking about it. “The premium on Irish bonds has doubled since August and is now wider than the spread on Greek debt four days before it sought a European Union-led bailout in April.” Ireland can fall apart at any minute but the market and media is totally ignoring it. Forewarned is forearmed.