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
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
Posted in Sovereign debt crisis
Tagged 2010 European sovereign debt crisis, Euro, Eurozone, greece, Ireland, italy, portugal, Sovereign default, spain
Disregarding the discussion about the political effects of the protests in the Middle East, how about the financial implications?
The cost of protecting sovereign debt against non-payment in northern Africa and the Middle East continued to rise Tuesday as investors reacted to ongoing turmoil in Libya. Morocco was hardest hit, with the spread on five-year credit default swaps widening to 200 basis points from around 184 on Monday, according to data provider Markit. That means it would cost $200,000 annually to insure $10 million of Moroccan debt against default for five years, up from $184,000. The Egyptian CDS spread widened 19 basis points to 375, Markit said, while Bahrain’s spread widened 10 basis points to 317. The Israel CDS spread widened to 163 from 154.
Losses by banks in this region will only hurt the important countries’ fiscal situation.
Looking at Portugal, now the key country, interest rate are new highs.
The turmoil in the Middle East just adds a new twist to the sovereign debt crisis. Until nations reduce their debt levels, which none are doing right now, this story is far from over and will be around for years to come.
So now Japan is bailing out the at-risk Euro countries.
Japan on Tuesday threw its support behind Europe’s bailout efforts, saying it will take a major stake in a bond offering for Ireland later this month by one of the special funds set up in the wake of the euro-zone sovereign debt crisis.
The government plans to buy more than 20% of a bond offering by the European Financial Stability Facility, expected some time this month, Finance Minister Yoshihiko Noda said at a press conference. The EUR440 billion fund was set up in June 2010 to help finance bailout efforts.
But where exactly is Japan getting the money from to buy these bonds? Japan’s been running big deficits for years and has debt of 201 percent of GDP, much larger than those European countries. But Japan pays almost nothing in interest rates on its own debt and is buying higher yielding bonds, profiting from the spread.
From a more macro viewpoint, Japan is monetizing the Euro debt just as the Fed is monetizing the US debt. But the difference is huge. These Euro countries are much closer to defaulting than the United States is and the spread between short-term Japanese rates and long-term Euro rates is much larger than the spread between short- and long-term rates in the US. Though Japan’s purchase is “only” 88 billion Euros compared to the Fed’s $600 billion in QE2 alone, Japan has a smaller economy and is taking a much larger risk.
The Yen and Nikkei index fell after the news. Japan should worry about its own fiscal and economic situation before trying (and likely failing) to help others.
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