The eurozone debt crisis is growing. Ireland’s bail-out has simply fuelled concern that other countries will need rescuing. Ten-year bond yields in Portugal, widely feared to be the next country to seek help, have kept rising. Meanwhile, their Spanish counterparts are at their highest since the euro’s inception in 1999. The crisis has also engulfed Italy. The ten-year yield spread over safe German bunds has reached a euro-era high of more than 2%. Investors are also looking more closely at Belgium. Its ten-year yields have rocketed to an 18-month high over the past few days.
The jitters have reached the corporate debt market too. Spanish, Portuguese and Irish companies and banks are finding it harder and more expensive to borrow. For some banks, “the bond and credit markets are completely closed”, said one banker. Yields fell slightly mid-week on hopes that the European Central Bank could temper the rise in borrowing costs by buying some sovereign debt. The euro has hit its lowest rate against the greenback since September.
What the commentators said
The debt crisis “is becoming a self-sustaining, self-feeding phenomenon”, said Damian Reece in The Daily Telegraph. Bond investors don’t believe governments’ claims that they don’t need a bail-out. So they sell their debt, sending interest rates, and hence borrowing costs, higher, making a bail-out more likely. And getting a bailout doesn’t solve the basic problem, said Marcus Walker in The Wall Street Journal. Countries on the eurozone periphery simply “have more debt than their weak economies can cope with”.
That’s the potential problem with Italy. While its budget deficit did not spiral in the recession like other countries’, its overall debt pile of 120% of GDP is massive and the economy is growing too slowly to make a serious dent in it. Belgium, meanwhile, looks better. Growth has rebounded and its budget deficit is below the eurozone average. But the debt pile is above 100% of GDP and the country has been without a government since April. Fears of a split between the Flemish and the French segments of the country are growing.
The fact that Ireland’s now-stricken banks passed the July stress tests has undermined confidence in bank balance sheets generally. Hidden and further losses imply yet more damage to national budgets. And the financing drought for Spanish and Portuguese banks threatens to hamper the recovery, making the budget crisis worse. “A liquidity problem for the banks could turn into a solvency problem for companies,” said Emilio Ontiveros of Madrid research group AFI. It’s looking increasingly unlikely, said Walker, that the common currency is going to survive in its present form.