Several beleaguered countries are stumbling from bad to worse under the weight of very high and potentially unsustainable debt.

EUROPEAN politicians and central bankers attempting to distance themselves from the rolling debt crises engulfing their neighbours have provided useful geographical clarifications.

Before succumbing to last year's inevitable bailout by the European Union and International Monetary Fund, the Irish government assured the world that Ireland was not Greece.


Portugal is now telling everyone it is neither Greece nor Ireland. Spain insists it is not Greece, Ireland or Portugal. Italy insists it is none of the above, as does Belgium, which also wants the world to know that it should not be confused with Italy.  

Russian writer Leo Tolstoy wrote: ''All happy families resemble one another, every unhappy family is unhappy in its own way.'' The same applies to beleaguered European countries.

Greece had a bloated public sector and an uncompetitive economy sustained by low euro interest rates.  

Ireland suffered from excessive dependence on the financial sector, poor lending, a property bubble and an increasingly generous welfare state.  

Portugal, which over recent weeks has been experiencing its own moment of vertigo, has slow growth, anaemic productivity, large budget deficits and poor domestic savings.  

Spain has low productivity, high unemployment, an inflexible labour market and a banking system with large exposures to property and European sovereigns.  

Italy has low growth, poor productivity and a close association with the other peripheral European economies. Italy has recently started to rein in its budget deficit. The Italian banking system is relatively healthy but exposed to European sovereign debt.  

Belgium is really two ethnic groups that share a king and high levels of debt (about €470 billion - $A622 billion - 100 per cent of GDP), and little else.  

These European countries do have a few things in common. Among them are very high and potentially unsustainable debt and a reliance on foreign investors to purchase their debt. The rising cost of borrowing increasingly makes high levels of debt unsustainable because of the cost of interest payments. Eventually, countries lose access to commercial funding sources, which is what happened to Greece and Ireland.

By the end of 2010, the cost of funds for the relevant countries had risen, in some cases to punitive levels.

Greek debt is trading at about 12 per cent. Ireland trades at about 9.5 per cent. Portugal trades at about 7 per cent. Spanish debt now trades at 6 per cent while Italy is trading close to 5 per cent.

Rising rates result in unrealised losses on investor holdings of the debt. In total, banks have lent more than $2.2 trillion to the group of countries that have come to be known as the ''PIGS'' (Portugal, Ireland, Greece and Spain).

French and German banks have lent about $510 billion and $410 billion respectively. British banks have lent $324 billion to Ireland and Spain. Spain, which may need financial support, has a $98.3 billion exposure to Portugal, as well as a $17.7 billion exposure to Ireland.

Stronger countries that move to support weaker countries by financing bailouts do so at the risk of damaging their own credit quality and ability to raise funds. As concerns about the peripheral countries have increased, interest rates for Germany and France, which would have to bear the burden of supporting others, have risen. Europe increasingly resembles mountaineers roped together. As the members fall one by one, the survival of the stronger ones is increasingly threatened.

European leaders see markets as the cause of the problems. But unsustainable debt remains the heart of the problem.

The EU and IMF hope the bailouts of Greece and Ireland will restore market confidence. Stronger growth, greater fiscal discipline and domestic structural reforms would allow the troubled countries to regain access to markets. While not impossible, the chances of this script playing out are minimal.

A more likely scenario is that the support measures do not work and increasingly Portugal and Spain, initially, find themselves under siege. As market access closes, they too will need bailouts straining existing arrangements, necessitating new measures.

Over the past week, Portugal and Spain have managed to issue debt successfully, giving investors confidence - temporarily - that the problems are manageable.

However, in Portugal's case, the debt carried a 6.7 per cent yield. Portugal's 10-year bonds briefly reached 7 per cent earlier this month - a level investors demanded from Greece and Ireland shortly before both capitulated and accepted



bailout packages. This week's issues will do little to alleviate longer-term pressure. If Portugal (debt about €180 billion) were to require help, then it would reduce available funds in the existing EU's bailout mechanism. Spain (with more than €950 billion debt) is simply too big to bail out using the present facilities.  

Under such a scenario, available options include greater economic integration of the EU, expansion of arrangements (established as the European Financial Stability Facility, or EFSF) or a decision to allow indebted countries to fail.

Greater economic integration would entail adopting a common fiscal policy, encompassing strict controls on fiscal policy including tax and spending.  

perceptions_now wrote on Jan 15^th, 2011 at 2:32pm:


Debt becomes the heart of the problem as growth in economies slows. You then have less revenue to do all that you had to do in the past plus service debt. Then you have to increase revenue (higher tax etc.), borrow more or just don't pay your debts, especially if your a country like the US. For example the biggest debtor to the UN is the USA and that's even where there was a vote to reduce the liability...they still havn't coffed up. In the past you could just loot another country or countries like the Romans when the coffers were falling...Iraq...?
Whenever you hear a politician saying debt levels are manageable they are lying.
Growth is not infinate, there is no magic pudding.