Tag: portugal

  Too often commentary on the European debt crisis has been like handicapping a horse race (“this country is leading the race to default, but this other nation is catching”).

  While interesting, it is useless in trying to figure out how this relates to the average person.

 The first thing you have to understand is who the players are and how they are connected.

  It’s taken a very long time, but the easily predictable implosion to Europe’s sovereign debt crisis is finally approaching.

  The same day that thousands of protestors against austerity measures returned to the streets in Athens, the Greek bailout talks also collapsed.

 “I expect a hard default definitely before March, maybe this year, and it could come with this program review,” said a senior IMF economist who is keeping close tabs on the situation. “The chances for a second program are slim.”

 Europe’s financial leaders want Greece to cut its budget further in order to make up for the gap that has been caused by the deepening recession. Of course the cuts are making the fiscal gap worse by slowing the economy further.

  Meanwhile, yields on 1-year Greek bonds have hit 70%, a level so far above affordable that a Greek default is already priced into.

  While America was distracted with issues of guns, political rhetoric, and domestic violence, the sovereign debt crisis in Europe reached its next tipping point.

 Alan Wilde, head of fixed income and currency at Baring Asset Management, said: “The crisis is reaching another key phase with debt auctions this week. It seems unlikely that Portugal can avoid a bail-out.”..

 In a further blow to Mr Sócrates, António Bagão Félix, a respected former finance minister and rightwing politician, said on Monday that it was no longer a question of “if” Portugal would have to turn to the European financial stability facility, the EU bail-out fund, for help, but “when”.

  The cost to the country of high bond yields was increasing every day, he said. “The situation is unsustainable.”

 The European Central Bank was forced to intervene on Portugal’s bond market on Monday when investors came close to abandoning the country’s debt entirely. The yield on 10-year bonds reached a near high of 7.18%, a rate similar to that which triggered the bailouts of Ireland and Greece.

  The news started today with S&P downgrading Greek bonds to junk. It wasn’t just the sovereign debt that became junk, but also the debt of many of the major Greek banks as well.

  This dramatically increases the risk of default because junk rated bonds cannot be swapped for Euro-backed bonds, and this has markets very worried.

 Investors in Greek bonds may get back between 30 percent and 50 percent of the value of their holdings should the government default or restructure its debt, S&P said.

  There is a concept in economics known as the “snow-ball effect” on debt. It involves the self-reinforcing effect of debt accumulation arising when the growth of the national economy is less than the interest paid on public debt.

  In math it looks like this:

 I’m not going to focus on the mathematics here when the way the financial markets are reacting to Greece is all you really need to know.

 Insurance costs against a Greek government default leapt to a record after leading debt analysts warned the country’s economy could face a ‘slow death’ because of its deteriorating finances.

 The concern is that Greece’s economy is fundamentally uncompetitive in the world market, that it must borrow just to maintain its basic needs, and that interest payments on the debt accumulation is now reaching levels that has forced Greece to drastic action. Raising taxes and cutting social services to pay the interest will smother the economy further, making more borrowing necessary.