Now that the Greek bail-out is being hailed as the tremendous success it is (sarcasm intentional), Spain is reportedly seeking a similar, but far bigger, rescue package of its own.
Sentiment towards Spain was hit by press reports, later denied by the European Commission, that the European Union (EU), International Monetary Fund (IMF) and U.S. Department of Treasury were drawing up a liquidity plan for Spain, including a credit line of up to €250 billion, about twice the amount made available to Greece.
Yields on Spain's sovereign debt are rising, but are still far below levels which would indicate immediate and irreversible distress. Spanish 10-year bond yields rose 12 basis points to 4.85% yesterday, the highest since July 2008, taking the spread over German Bunds to 2.21% – the highest since the introduction of the Euro in January 1999.
Spain faces a significant refinancing hurdle next month when €16 billion of bonds will need to be re-financed. While memories of the Greek crisis are at the forefront of investor minds, Madrid is nowhere near the crisis situation experienced by Athens. Spain's 10-year bond yield is still below 5%, which is less than Greece is paying on its IMF facility. Greece didn't seek emergency funding until its two-year bond yield reached 10%. By comparison, Spanish two-year bonds currently yield a very comfortable 3.3%.
Madrid's banking system, however, is a completely different story. Spanish banks borrowed €85.6 billion from the European Central Bank (ECB) last month. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and one sixth of net Euro-Zone loans offered by the central bank.
This is the highest amount since the launch of the Euro-Zone in 1999 and a disproportionately large share of the emergency funds provided by the Euro’s monetary authority, according to an analysis by Royal Bank of Scotland (RBS). Spanish banks account for 11% of the Euro-Zone banking system.
The rise in borrowing from €74.6 billion in April, which makes up nearly 15% of the net liquidity pumped by the ECB into the Euro-Zone financial system, provides further evidence of the acute distress in the Spanish financial sector.
RBS estimates the total amount of Spanish liabilities held by overseas investors is €1.5 trillion, or 142% of the country’s Gross Domestic Product (GDP). By comparison, Madrid's budget deficit is fairly tame, at approximately 60% of GDP - a far cry from Greece, which is well in excess of 100%. Of the total debt held by external investors, more than half, or €770 billion, has been issued by Spanish banks.
While investors have not yet required high yields on Spain's sovereign debt, the concern is that the situation in Madrid will continue to deteriorate. With austerity measures in place which will undoubtedly weigh on the Spanish economy, 4th largest in the Euro-Zone, investors have every reason to doubt that the situation will turn around anytime shortly.
Every European country that gets in financial trouble causes every other country to suffer. So goes Greece, so goes Spain, so goes Portugal, so goes Ireland and on and on. Even France and Germany can only absorb so much. With such low yields on its sovereign debt, it's no wonder that investors are beginning to refrain from Spain.
Marko's Take
Showing posts with label Spain. Show all posts
Showing posts with label Spain. Show all posts
Thursday, June 17, 2010
Wednesday, May 26, 2010
Euro-Zone Debt Auctions Yield Mixed Results
As Global stock markets recover from the sudden volatility of the last few weeks, the Euro-Zone nations have been tapping into the bond markets to raise funds to finance their growing budget deficits and maturities on the external debt.
Germany had difficulties selling its 5-year bonds this morning, as record low yields curtailed demand, but the sale of a small issue of Portuguese bonds was well received, helped by more attractive yields.
Berlin's 5-year bonds fell in post-auction trade, driving the yield to a session peak of 1.524% versus 1.492% ahead of the auction. However, it remained near a record low of 1.402% reached on Tuesday.
Portugal sold €1 billion of 2015 bonds at an average yield of 3.70%, drawing demand of 1.8 times the amount sought, steady from the previous auction in February.
Italy will sell up to €1.5 billion of inflation-protected bonds on Thursday and up to €9.5 billion of nominal bonds on Friday.
Spain struggled to issue debt on Tuesday amid rising tensions in the new issue markets after the seizure of one of the country’s savings banks over the weekend.
Spain had to pay a big premium to sell €3.06 billion in 3-month and 6-month bills on Tuesday, reflecting investor anxiety about its growing debt and weakening financial sector, prompting worries that the country could suffer a bond auction failure, where not enough investors turn up to buy its debt.
The yield on Spain’s 6-month bill rose to 1.32% compared with 0.76% in April, while the yield on the 3-month bill rose to 0.7% from 0.549% .
In a sign of how investors are increasingly selective over Euro-Zone debt, the Dutch successfully raised €1.02 billion.
The Netherlands, which has a triple A credit rating with relatively strong public finances, raised the money in 5-year bonds at an average yield of 1.74% and 7-year bonds at an average yield of 2.305%
The debt problem is hardly unique to Europe. The United States is also facing a massive budget deficit and very onerous levels of external debt. In fact, Moody's has warned that the U.S. faces the loss of ITS triple A credit rating if the debt situation is not brought under control. Readers of "Marko's Take" know that the worldwide and domestic debt situation is going parabolic.
Recent statistics on external debt to Gross Domestic Product (GDP) reveal how fragile the global financial structure is. Sometime in the next 12 months, the ratio here in the U.S. will exceed 100%, which will put Washington in a club whose membership is growing rapidly.
Countries with Debt/GDP ratios in excess of 100% include Japan, Britain, Zimbabwe, Sweden, the Netherlands, Greece, Ireland, Belgium, Denmark, Austria, France, Portugal, Finland, Norway, Spain and Italy. Japan, is the highest among the G-20 with a ratio well in excess of 200%.
The proposed solution to the deteriorating situation has been to raise more debt. Would anyone propose assisting a cocaine addict by giving them more cocaine? As a result, the liklihood that the debt problem will be fixed is NIL. The only approach which can solve the problem is a dramatic restructuring of these countries' economic systems, including getting a handle on runaway social welfare programs which are exploding with the aging population structures.
Temporarily, the crisis in Sovereign Debt has taken a back seat with the much better reception in the credit markets. This will prove to be quite fleeting, with a more severe crisis inevitable, especially as the global economic weakness re-asserts itself.
Marko's Take
For new readers with a political bent, come visit us on You Tube. Our new video blog series covers such topics as The Federal Reserve, Social Security, Peak Oil and Personal Income Taxes. To access our videos click here http://www.youtube.com/markostaketv.
.
Germany had difficulties selling its 5-year bonds this morning, as record low yields curtailed demand, but the sale of a small issue of Portuguese bonds was well received, helped by more attractive yields.
Berlin's 5-year bonds fell in post-auction trade, driving the yield to a session peak of 1.524% versus 1.492% ahead of the auction. However, it remained near a record low of 1.402% reached on Tuesday.
Portugal sold €1 billion of 2015 bonds at an average yield of 3.70%, drawing demand of 1.8 times the amount sought, steady from the previous auction in February.
Italy will sell up to €1.5 billion of inflation-protected bonds on Thursday and up to €9.5 billion of nominal bonds on Friday.
Spain struggled to issue debt on Tuesday amid rising tensions in the new issue markets after the seizure of one of the country’s savings banks over the weekend.
Spain had to pay a big premium to sell €3.06 billion in 3-month and 6-month bills on Tuesday, reflecting investor anxiety about its growing debt and weakening financial sector, prompting worries that the country could suffer a bond auction failure, where not enough investors turn up to buy its debt.
The yield on Spain’s 6-month bill rose to 1.32% compared with 0.76% in April, while the yield on the 3-month bill rose to 0.7% from 0.549% .
In a sign of how investors are increasingly selective over Euro-Zone debt, the Dutch successfully raised €1.02 billion.
The Netherlands, which has a triple A credit rating with relatively strong public finances, raised the money in 5-year bonds at an average yield of 1.74% and 7-year bonds at an average yield of 2.305%
The debt problem is hardly unique to Europe. The United States is also facing a massive budget deficit and very onerous levels of external debt. In fact, Moody's has warned that the U.S. faces the loss of ITS triple A credit rating if the debt situation is not brought under control. Readers of "Marko's Take" know that the worldwide and domestic debt situation is going parabolic.
Recent statistics on external debt to Gross Domestic Product (GDP) reveal how fragile the global financial structure is. Sometime in the next 12 months, the ratio here in the U.S. will exceed 100%, which will put Washington in a club whose membership is growing rapidly.
Countries with Debt/GDP ratios in excess of 100% include Japan, Britain, Zimbabwe, Sweden, the Netherlands, Greece, Ireland, Belgium, Denmark, Austria, France, Portugal, Finland, Norway, Spain and Italy. Japan, is the highest among the G-20 with a ratio well in excess of 200%.
The proposed solution to the deteriorating situation has been to raise more debt. Would anyone propose assisting a cocaine addict by giving them more cocaine? As a result, the liklihood that the debt problem will be fixed is NIL. The only approach which can solve the problem is a dramatic restructuring of these countries' economic systems, including getting a handle on runaway social welfare programs which are exploding with the aging population structures.
Temporarily, the crisis in Sovereign Debt has taken a back seat with the much better reception in the credit markets. This will prove to be quite fleeting, with a more severe crisis inevitable, especially as the global economic weakness re-asserts itself.
Marko's Take
For new readers with a political bent, come visit us on You Tube. Our new video blog series covers such topics as The Federal Reserve, Social Security, Peak Oil and Personal Income Taxes. To access our videos click here http://www.youtube.com/markostaketv.
.
Thursday, May 13, 2010
PIGS Go To Slaughter
Now that the Greek bailout has been undertaken, the marketplace is turning its attention to other nations believed to be under economic or financial stress. The term "PIGS" originally referred to the "fearful foursome" of Portugal, Ireland, Greece and Spain. Italy has appeared to be on the verge of joining this uneviable assemblage of financial wreckage - creating the revised "PIIGS".
As has been written here in recent weeks, the so-called austerity program enacted by Greece is a farce. It is hardly "austere" to force lazy government workers to actually work! It is hardly austere to reduce the absurdly generous early retirement packages which allow some civil servants to retire as young as 45. Where can I sign up for that deal?
The other PIGS are now enacting their own "austerity" measures in an attempt to be more pro-active before their nations hit the crisis fever that was triggered by the Greek financial meltdown.
José Sócrates, Portugal’s prime minister, is expected to announce tough new austerity measures today, including a “crisis tax” on companies and wages, to reduce the country’s massive budget deficit.
Portugal's new austerity package, which follows similar moves by Spain, Greece and Ireland, is being introduced under pressure from Lisbon’s European Union partners for sharp budget cuts in support of a €750 billion emergency plan to defend the Euro.
Angry trade union leaders immediately called for a “mobilisation” against what they called “harsh and unjust” measures, expected to include a 1 % increase in value added tax to 21% and increases of up to 1.5 % in income tax. Unions opposed to cuts? Shocking! (Sarcasm intentional)!
The increases are expected to include a 2.5 % increase in corporate tax to 27.5 %. Politicians and public sector managers will also see their salaries cut by 5 %.
The new measures are designed to reduce the budget deficit by an additional €2.1 billion, from 9.4 % of Gross Domestic Product (GDP) in 2009 to 7 % this year and 2.8 % in 2013. Portugal’s original deficit target for this year was 8.3 % of GDP.
José Luis Rodríguez Zapatero, Spain’s prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 % cut in civil service pay to accelerate cuts to the country’s budget deficit.
In what he called one of the hardest speeches of his life, Mr Zapatero told parliament how Spain planned to reduce its deficit by an extra 0.5 % of GDP this year and another 1 % of GDP in 2011, a total of €15 billion.
The new measures should help bring the deficit down from 11.2 % of GDP in 2009 to just over 6 % of GDP in 2011.
Surprisingly, trade unionists were outraged at what they said were harsh measures. One regional leader of the small United Left political party called for “rebellion and a general strike”. Shocking! (Sarcasm intentional)!
Thus far, Ireland has surprised the market skeptics by pro-actively embarking on a draconian plan to tackle its debt, which includes large public sector pay cuts, and resolve the bad loan problems at its banks.
Pledging to cut public sector spending by 7.5 % of GDP this year alone has not spared Ireland market pain. Last week its bonds were trading at a spread of 3 % over German Bunds. The moves have prevented the country from being deemed a full-blown basket case.
Italy, has been on the cusp of becoming the 5th member of this elite group. However, a very well received bond sale indicates that Rome is not yet ready for inclusion. Italy just sold €3 billion of 2015 notes at an average yield of just 2.57 %, which was 2 basis points lower than existing comparable debt. This demonstrates a substantial level of market confidence.
The problems in the Euro-Zone only BEGIN with Greece. Bail-out or not, the key to success will be a return to economic growth for all the affected nations. Greek unemployment is now more than 12% and is expected to rise to 14% over the next year or so. Until the European Union economies start to show growth, the budget deficits will continue to widen and the threat of a massive round of sovereign debt defaults will be an ongoing issue.
Marko's Take
Please visit us on You Tube. You can access video blogs covering topics such as the Federal Reserve, Income Taxes, Social Security, Peak Oil and a mock "State Of The Union" address by clicking here http://www.youtube.com/markostaketv. Our most recent video is on the FRAUD and Ponzi Scheme known as Social Security. It can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
As has been written here in recent weeks, the so-called austerity program enacted by Greece is a farce. It is hardly "austere" to force lazy government workers to actually work! It is hardly austere to reduce the absurdly generous early retirement packages which allow some civil servants to retire as young as 45. Where can I sign up for that deal?
The other PIGS are now enacting their own "austerity" measures in an attempt to be more pro-active before their nations hit the crisis fever that was triggered by the Greek financial meltdown.
José Sócrates, Portugal’s prime minister, is expected to announce tough new austerity measures today, including a “crisis tax” on companies and wages, to reduce the country’s massive budget deficit.
Portugal's new austerity package, which follows similar moves by Spain, Greece and Ireland, is being introduced under pressure from Lisbon’s European Union partners for sharp budget cuts in support of a €750 billion emergency plan to defend the Euro.
Angry trade union leaders immediately called for a “mobilisation” against what they called “harsh and unjust” measures, expected to include a 1 % increase in value added tax to 21% and increases of up to 1.5 % in income tax. Unions opposed to cuts? Shocking! (Sarcasm intentional)!
The increases are expected to include a 2.5 % increase in corporate tax to 27.5 %. Politicians and public sector managers will also see their salaries cut by 5 %.
The new measures are designed to reduce the budget deficit by an additional €2.1 billion, from 9.4 % of Gross Domestic Product (GDP) in 2009 to 7 % this year and 2.8 % in 2013. Portugal’s original deficit target for this year was 8.3 % of GDP.
José Luis Rodríguez Zapatero, Spain’s prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 % cut in civil service pay to accelerate cuts to the country’s budget deficit.
In what he called one of the hardest speeches of his life, Mr Zapatero told parliament how Spain planned to reduce its deficit by an extra 0.5 % of GDP this year and another 1 % of GDP in 2011, a total of €15 billion.
The new measures should help bring the deficit down from 11.2 % of GDP in 2009 to just over 6 % of GDP in 2011.
Surprisingly, trade unionists were outraged at what they said were harsh measures. One regional leader of the small United Left political party called for “rebellion and a general strike”. Shocking! (Sarcasm intentional)!
Thus far, Ireland has surprised the market skeptics by pro-actively embarking on a draconian plan to tackle its debt, which includes large public sector pay cuts, and resolve the bad loan problems at its banks.
Pledging to cut public sector spending by 7.5 % of GDP this year alone has not spared Ireland market pain. Last week its bonds were trading at a spread of 3 % over German Bunds. The moves have prevented the country from being deemed a full-blown basket case.
Italy, has been on the cusp of becoming the 5th member of this elite group. However, a very well received bond sale indicates that Rome is not yet ready for inclusion. Italy just sold €3 billion of 2015 notes at an average yield of just 2.57 %, which was 2 basis points lower than existing comparable debt. This demonstrates a substantial level of market confidence.
The problems in the Euro-Zone only BEGIN with Greece. Bail-out or not, the key to success will be a return to economic growth for all the affected nations. Greek unemployment is now more than 12% and is expected to rise to 14% over the next year or so. Until the European Union economies start to show growth, the budget deficits will continue to widen and the threat of a massive round of sovereign debt defaults will be an ongoing issue.
Marko's Take
Please visit us on You Tube. You can access video blogs covering topics such as the Federal Reserve, Income Taxes, Social Security, Peak Oil and a mock "State Of The Union" address by clicking here http://www.youtube.com/markostaketv. Our most recent video is on the FRAUD and Ponzi Scheme known as Social Security. It can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Wednesday, April 28, 2010
Euro-Zone Contagion Spreads
Greece’s credit rating was cut 3 steps to junk status by Standard and Poor’s (S&P), the first time a Euro-Zone member has lost its investment grade since the currency’s 1999 debut. The Euro weakened and stock markets throughout the region tumbled.
Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30% of their initial investment if the country restructures its debt. The move, which puts Greek debt on par with bonds issued by Azerbaijan and Egypt, came minutes after the rating agency reduced Portugal by two steps to A- from A+.
Yesterday, the spread on Greek 10-year bonds over German counterparts widened to 6.75%, the highest since at least 1998, as investors increased bets that Greece will restructure its debt. The Portuguese spread jumped 0.59% to 2.77% and the Spanish spread rose to 1.13%.
The spread between Portugese and benchmark German 10-year bonds rose about 0.5% Tuesday to reach its highest point since the creation of the Euro. The higher spread demonstrates less confidence in Portugal, whose bonds had an interest rate of 5.86% higher than German bonds on Tuesday.
Germany, where the bail-out is unpopular with voters, has been slow in authorizing the release of funds. Its delay has furthered market panic and driven Greek 2-year bond yields to as high as 21%.
Greek 5-year yields hit 10.6%, higher than many emerging market economies, including Ecuador at 10.5% and Ukraine at 7.1%.
The carnage continued into this morning's early trading. The yield on 10-year Greek bonds surged to 11.24% early Wednesday from 9.68% on Tuesday. The yield is the highest for the 10-year since the introduction of the Euro in 2002. The 2-year bonds were trading with yields approaching 20%.
Today's jump in the yield on the Greek bond has led to an enormous spread of 8.22% compared with German bond yields. The yield on the German 10-year bond, considered the European benchmark, slipped to 3.02% early Wednesday, suggesting a flight to safety.
Greece needs to raise AT LEAST 9 billion Euros by May 19, but, given the current market yields, will have no chance of attracting institutional investors.
The marketplace has now spoken. Greece will need a major restructuring and existing bondholders will receive a haircut of at least 50% and possibly larger. The bail-out package, just activated, will be insufficient to cure the disease. While Germany continues to say the right things, such as indicating that Greece must not be allowed to fail, it has yet to act. Given the growing unpopularity in Germany of bailing out Greece, any aid package remains to be seen.
The only question now is how far the contagion will spread. Will Portugal be next to fall in the abyss? How many more countries will be taken down? No need to worry. Marko's Take is on the job.
Marko's Take
Please visit our new YouTube channel at http://www.youtube.com/markostaketv. Our new video blog on the Legality of the Personal Income Tax can be accessed by clicking here (http://www.youtube.com/markostaketv#p/u/0/1TInKnCIikg). Our newest video, entitled "Social In-Security: The Problem" will be posted this weekend.
Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30% of their initial investment if the country restructures its debt. The move, which puts Greek debt on par with bonds issued by Azerbaijan and Egypt, came minutes after the rating agency reduced Portugal by two steps to A- from A+.
Yesterday, the spread on Greek 10-year bonds over German counterparts widened to 6.75%, the highest since at least 1998, as investors increased bets that Greece will restructure its debt. The Portuguese spread jumped 0.59% to 2.77% and the Spanish spread rose to 1.13%.
The spread between Portugese and benchmark German 10-year bonds rose about 0.5% Tuesday to reach its highest point since the creation of the Euro. The higher spread demonstrates less confidence in Portugal, whose bonds had an interest rate of 5.86% higher than German bonds on Tuesday.
Germany, where the bail-out is unpopular with voters, has been slow in authorizing the release of funds. Its delay has furthered market panic and driven Greek 2-year bond yields to as high as 21%.
Greek 5-year yields hit 10.6%, higher than many emerging market economies, including Ecuador at 10.5% and Ukraine at 7.1%.
The carnage continued into this morning's early trading. The yield on 10-year Greek bonds surged to 11.24% early Wednesday from 9.68% on Tuesday. The yield is the highest for the 10-year since the introduction of the Euro in 2002. The 2-year bonds were trading with yields approaching 20%.
Today's jump in the yield on the Greek bond has led to an enormous spread of 8.22% compared with German bond yields. The yield on the German 10-year bond, considered the European benchmark, slipped to 3.02% early Wednesday, suggesting a flight to safety.
Greece needs to raise AT LEAST 9 billion Euros by May 19, but, given the current market yields, will have no chance of attracting institutional investors.
The marketplace has now spoken. Greece will need a major restructuring and existing bondholders will receive a haircut of at least 50% and possibly larger. The bail-out package, just activated, will be insufficient to cure the disease. While Germany continues to say the right things, such as indicating that Greece must not be allowed to fail, it has yet to act. Given the growing unpopularity in Germany of bailing out Greece, any aid package remains to be seen.
The only question now is how far the contagion will spread. Will Portugal be next to fall in the abyss? How many more countries will be taken down? No need to worry. Marko's Take is on the job.
Marko's Take
Please visit our new YouTube channel at http://www.youtube.com/markostaketv. Our new video blog on the Legality of the Personal Income Tax can be accessed by clicking here (http://www.youtube.com/markostaketv#p/u/0/1TInKnCIikg). Our newest video, entitled "Social In-Security: The Problem" will be posted this weekend.
Sunday, April 25, 2010
Greek Financial Crisis Passing Point Of No Return
After months of increasingly desperate attempts to fix Greece, things have deteriorated to such an extent that they may be no longer fixable.
On Friday, Greece formally requested to access a $60 billion emergency aid package, initiating a bailout process that will test the financial strength of Euro-Zone.
Prime Minister George Papandreou called his country's economy a "sinking ship," as borrowing costs reached 12-year highs and recent fiscal measures didn't create the market support needed to save his country.
The yield on Greece's benchmark two-year note topped 11%, ten-year bond yields reached 8.83%, while rating agency Moody's downgraded the country's credit rating one notch to A3 - the second downgrade this year. European Union statistics service Eurostat on Thursday revised Greece's deficit to 13.6% of Gross Domestic Product (GDP) in 2009, up from 12.7%, questioning the country's ability to reduce the budget deficit to 8.7% this year as planned. The revision is up from 13% of GDP just a month ago.
Greece is facing $11.4 billion of bonds maturing on May 19 and hopes a request made now will accelerate the bailout process in time to meet that deadline.
Even if this initial bailout package is adopted, it is questionable as to whether it will even cover Greece's debt obligations for 2010.
The Economist projects Greece will run up an additional $89 billion in debt by 2014, doubting Greece's ability to make effective budget cuts while trying to emerge from a recession. As debt piles up, investors will be less likely to buy Greek bonds and draconian austerity fixes will hinder economic growth.
Sovereign debt concerns have already spread to other Euro-Zone nations and are escalating with Greece's situation. Fellow "PIGS" (Portugal, Ireland Greece and Spain), already faced increasing bond yields this week, strengthening the argument that Greece is the start of a debt contagion spreading through Europe to the United States.
The aid package will give Greece $40 billion in 3-year loans from its fellow Euro-Zone nations at a 5% interest rate and an additional $20 billion from the International Monetary Fund (IMF) will be available at an even lower rate. The offer was announced a couple of weeks ago in hopes the pledge of support would be enough to encourage investor confidence.
As yields on sovereign debt of the "PIGS" nations grow, the likelihood of raising capital from institutional investors diminishes. Greece had hoped to raise $10 billion from U.S. investors, but now that appears to be dead. As the contagion continues to spread, it's a matter of time before the thin fabric of the global financial community takes many more countries down with it.
Marko's Take
Please visit us on YouTube. We have just posted a video blog on the Legality Of The Personal Income Tax (http://www.youtube.com/markostaketv#p/u/0/1TInKnCIikg) or, if you're interested in a new technology to put 3D content on any smart phone, visit my new website at http://e3dlabs.com/.
On Friday, Greece formally requested to access a $60 billion emergency aid package, initiating a bailout process that will test the financial strength of Euro-Zone.
Prime Minister George Papandreou called his country's economy a "sinking ship," as borrowing costs reached 12-year highs and recent fiscal measures didn't create the market support needed to save his country.
The yield on Greece's benchmark two-year note topped 11%, ten-year bond yields reached 8.83%, while rating agency Moody's downgraded the country's credit rating one notch to A3 - the second downgrade this year. European Union statistics service Eurostat on Thursday revised Greece's deficit to 13.6% of Gross Domestic Product (GDP) in 2009, up from 12.7%, questioning the country's ability to reduce the budget deficit to 8.7% this year as planned. The revision is up from 13% of GDP just a month ago.
Greece is facing $11.4 billion of bonds maturing on May 19 and hopes a request made now will accelerate the bailout process in time to meet that deadline.
Even if this initial bailout package is adopted, it is questionable as to whether it will even cover Greece's debt obligations for 2010.
The Economist projects Greece will run up an additional $89 billion in debt by 2014, doubting Greece's ability to make effective budget cuts while trying to emerge from a recession. As debt piles up, investors will be less likely to buy Greek bonds and draconian austerity fixes will hinder economic growth.
Sovereign debt concerns have already spread to other Euro-Zone nations and are escalating with Greece's situation. Fellow "PIGS" (Portugal, Ireland Greece and Spain), already faced increasing bond yields this week, strengthening the argument that Greece is the start of a debt contagion spreading through Europe to the United States.
The aid package will give Greece $40 billion in 3-year loans from its fellow Euro-Zone nations at a 5% interest rate and an additional $20 billion from the International Monetary Fund (IMF) will be available at an even lower rate. The offer was announced a couple of weeks ago in hopes the pledge of support would be enough to encourage investor confidence.
As yields on sovereign debt of the "PIGS" nations grow, the likelihood of raising capital from institutional investors diminishes. Greece had hoped to raise $10 billion from U.S. investors, but now that appears to be dead. As the contagion continues to spread, it's a matter of time before the thin fabric of the global financial community takes many more countries down with it.
Marko's Take
Please visit us on YouTube. We have just posted a video blog on the Legality Of The Personal Income Tax (http://www.youtube.com/markostaketv#p/u/0/1TInKnCIikg) or, if you're interested in a new technology to put 3D content on any smart phone, visit my new website at http://e3dlabs.com/.
Tuesday, February 9, 2010
Sovereign Debt Crisis Threatens To Take Down World Economy
First we had countries which fell under the acronym "BRIC" - Brazil, Russia, India and China. These countries were believed to be the emerging world powerhouses. Now, we have a new one: "PIGS", or Portugal, Italy, Greece and Spain. In the case of PIGS, the acronym is not in the least flattering. Rather, it refers to a group of countries in such financial trouble that their sovereign debt is threatening to pull down the European Union (EU) and possibly the global economy altogether!
The sign that major stresses can be felt is being witnessed in both the bond markets and the countries'
"Credit Default Swaps" (CDS), which price the "insurance" against default. Recently, Spain's and Italy's bonds have carried a CDS of 1.65%, Italy's have risen above 1.5%, while Greece's have expanded to a frightening 4%. To put things in perspective, the United States, no longer considered a great credit, has an active CDS market priced at less than 0.5%! Ireland, not officially a PIGS country, but guilty by association, has its CDS in the 1.5% range.
About six weeks ago, I wrote a piece on Soverien Debt (http://markostake.blogspot.com/2009/12/investing-in-soverign-debt-much-riskier.html. Reading this might provide some excellent background for anyone unfamiliar with the issues.
According to a recent article in the Wall St. Journal, the global economic downturn and extensive government spending to fight it, have led to major fiscal problems in Europe, especially for less-dynamic economies like Greece, Portugal, Ireland and Spain. Such countries took advantage of their membership in the 16-nation euro-bloc during the boom by borrowing at unusually low interest rates. But now, investors are worried about how they will reduce yawning budget deficits that exceed 12% of their economic output in the case of Greece and Ireland.
European policy makers are trying to pressure countries like Greece into taking stronger action to fix their finances.
The potential damage from any sovereign default in the EU will affect the entire region which shares a currency but NOT fiscal policies. Now there is talk that Greece is looking to be "bailed out". Wonder where I've heard the words "bailed" and "out" before?
The sovereign debt isssue is another reason that 2010 is shaping up to be one nasty year!
Questions? Disagree? Agree? TAKE ME ON!
Marko's Take
The sign that major stresses can be felt is being witnessed in both the bond markets and the countries'
"Credit Default Swaps" (CDS), which price the "insurance" against default. Recently, Spain's and Italy's bonds have carried a CDS of 1.65%, Italy's have risen above 1.5%, while Greece's have expanded to a frightening 4%. To put things in perspective, the United States, no longer considered a great credit, has an active CDS market priced at less than 0.5%! Ireland, not officially a PIGS country, but guilty by association, has its CDS in the 1.5% range.
About six weeks ago, I wrote a piece on Soverien Debt (http://markostake.blogspot.com/2009/12/investing-in-soverign-debt-much-riskier.html. Reading this might provide some excellent background for anyone unfamiliar with the issues.
According to a recent article in the Wall St. Journal, the global economic downturn and extensive government spending to fight it, have led to major fiscal problems in Europe, especially for less-dynamic economies like Greece, Portugal, Ireland and Spain. Such countries took advantage of their membership in the 16-nation euro-bloc during the boom by borrowing at unusually low interest rates. But now, investors are worried about how they will reduce yawning budget deficits that exceed 12% of their economic output in the case of Greece and Ireland.
European policy makers are trying to pressure countries like Greece into taking stronger action to fix their finances.
The potential damage from any sovereign default in the EU will affect the entire region which shares a currency but NOT fiscal policies. Now there is talk that Greece is looking to be "bailed out". Wonder where I've heard the words "bailed" and "out" before?
The sovereign debt isssue is another reason that 2010 is shaping up to be one nasty year!
Questions? Disagree? Agree? TAKE ME ON!
Marko's Take
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