The financial crisis on the edge of the eurozone isn’t fresh news – investors have been concerned about problems in the ‘periphery’ since the revelation of Greece’s huge budget deficit rocked markets earlier this year. But the potential for a eurozone sovereign-debt crisis is hitting the front pages again due to concerns over European Union (EU) proposals to make bondholders share in the cost of future state bail-outs. Germany has pushed for some sort of ‘pain-sharing’ mechanism as the price of approving a permanent EU sovereign bail-out fund from 2013.
That’s made investors think twice about their exposure to the most indebted eurozone sovereigns – with Ireland and Portugal at the forefront. Ireland “has had a property bubble and crash, a regulatory failure, a banking disaster, and a fiscal crisis”, says Oliver O’Connor in The Wall Street Journal. “It’s an uncomfortable place for a small country.”
Investors are increasingly worried that Ireland may have to use the emergency borrowing facility set up by the EU in the wake of the original Greek debt crisis. Jitters over the forthcoming budget have brought matters to a head. Irish politicians are pulling out what stops they can. Last week the Ministry of Finance said it would cut the deficit – the excess of state spending compared with the tax take – to 3% of GDP by 2014 (from 32% currently) via e15bn in budget cuts, e6bn of which is to be delivered in 2011.
But this package may not arrive fast enough, nor be sufficient to keep markets happy. Ireland’s ten-year government yields have reached 8.6%, their highest in 15 years, as investors have dumped Irish bonds. “It’s close to a buyers’ strike,” says Jens Peter Soerensen at Danske Bank. “Something needs to happen in the next few weeks to change the dynamic.” Ireland may be able to avoid an immediate rescue, says Dara Doyle at Bloomberg, but “its cash may run out in the middle of next year unless it can raise money from the bond market in 2011”.
Certainly, rising credit default swaps show that investors are now more concerned about Ireland defaulting than they are about Argentina, says Tracy Alloway on FT Alphaville.
Despite its own politicians’ efforts, Portugal isn’t looking much healthier. Last year its budget deficit was the highest in the eurozone after Ireland, Greece and Spain. The Portuguese government’s aim is to lower the shortfall to 7.3% this year, 4.6% in 2011, and hit the EU’s 3% limit in 2012. The prime minister, José S”crates, “had hoped the 2011 tough austerity budget, approved after weeks of tense talks with the main opposition party, would remove Portugal from the ‘danger zone’ of bond market turbulence”, says Peter Wise in the FT. Instead, ten-year government bond yields were pushed out to 13-year highs of 7%. What’s more, the country faces a “challenging” bond redemption programme next year. Almost e10bn in government debt is due to expire in the first six months, says Wise. Renewing that debt could be difficult. Portugal’s total borrowing needs will rise from e18.9bn this year to e20.7bn in 2011, says the International Monetary Fund.
Greece now “despairs of escaping from its mountain of debt”, says Helena Smith in The Guardian, despite receiving one bail-out. So, it seems, do its bond investors – Greek ten-year yields have climbed to 11.4%, almost back to their May highs.
Austerity measures could make the periphery’s woes worse, says Vincent Chaigneau at Société Générale, hitting growth and hence the tax take just as countries need it most. Even with America’s QE2 scheme undermining the dollar, the euro has started to edge lower against the US currency. BNP Paribas expects the single currency to fall to $1.34 “by year end”, from around $1.38 now.