Greece hopes to get its hands on the EU/IMF bail-out package it has requested soon. So the markets’ “microscope” has been “hovering” over other struggling economies, says Simon Brown of Prospreads. The Portuguese ten-year bond yield hit 5.2% this week, an eight-year high. The spread over German ten-year paper also reached a new record. Spanish and Italian ten-year bond yields have jumped to two-month highs.
These countries “are on an unsustainable path of fast-rising debt” and need “drastic action to reduce their deficits”, says Ian Campbell on Breakingviews. But austerity risks worsening recessions and budget shortfalls – and may well be thwarted by public unrest. If the periphery “tightens hard to soothe bond markets, it… risks depression”, says Ambrose Evans-Pritchard in The Daily Telegraph.
Iberians are in trouble…
Portugal’s public debt pile of 85% of GDP is about a third smaller than Greece’s. But it is adding to it fast, with the budget deficit hitting 9.4% last year. It doesn’t help that it has to raise a sum worth 15% of its GDP this year from increasingly jittery markets, or that the lion’s share of its public debt is held by foreigners.
But the biggest worry is that “the Portuguese economy doesn’t really grow”, says Kenneth Wattrett of BNP Paribas. GDP growth has averaged 1% for a decade amid dwindling competitiveness and excessive regulation. Lisbon’s growth estimates have been deemed optimstic by the EU. Portugal has yet to convince markets that it will make the harsh fiscal adjustments needed, adds Lex in the FT.
Spain’s public debt is only 53% of GDP, although last year’s budget deficit was 11.2%. But a particular problem is the banking system, which is heavily exposed to the bursting housing bubble. Bad debts have jumped to 5% of the total from 3.2% in a year. A towering private debt load and unemployment already above 20% also militate against a growth rebound. Spain looks like a “sinking Armada”, as Gary Shilling puts it on Forbes.com.
… and now Italy’s a worry
Meanwhile, concern over Italy, largely ignored so far, is mounting, says
The Economist. It only had a budget deficit of 5.2% last year. But overall public debt is 115%, second only to Greece’s total. And for the first time since 1991, spending before interest costs is outstripping revenue. The “biggest question-mark” is whether the economy can grow fast enough to avoid savage cuts as the government tries to lower the deficit to under 3% in two years. The economy remains “grossly overregulated” and the government shows no interest in addressing the “deep structural problems” that are hampering growth.
What next?
Given all this, “it’s more likely than not”, says Harvard University’s Kenneth Rogoff, that “we’ll need an IMF programme in at least one more country in the euro area over the next two to three years”. Let’s hope it’s a small country that gets into trouble, as “neither the EU nor the IMF could afford” to bail out Italy or Spain, reckons The Economist. Spain’s government debt load is double that of Greece’s. Italy’s is five times bigger. And “if the euro faltered because of Greek debt, it would be laid flat by Italy’s”.
As the strains inherent in European monetary union become more apparent, investors are realising that far from being a new deutschmark, the euro is actually “a Greek drachma”, says Louis Bacon of Moore Capital. So expect its slide to continue: Shilling reckons it is on its way to parity with the dollar.