Earlier this week, Mint.com analyzed the basics of Europe’s sovereign debt crisis. The growing concern about Europe’s financial stability stems from the overindulgent borrowing of a handful of eurozone nations. Greece, Portugal, Spain and Ireland are among the main offenders. The world bond markets, skeptical that those countries can repay investors, have heavily downgraded the creditworthiness of their bonds. Today, we’ll take a deeper look at the unique problems encountered by each of these nations.
Greece’s debt woes are at the heart of the entire crisis. In a straightforward Q&A, CNN explained that 2008′s global financial meltdown “whisked away a curtain of partly fiddled statistics to reveal debt levels and deficits” far in excess of the European Union’s stated limits. In fact, so out of control is Greece’s borrowing problem that its debts (roughly $413.6 billion) actually outweigh its Gross Domestic Product, or GDP. When reporters and journalists talk about Greece’s 12.7% deficit, they mean that Greece spends 12.7% more than what it collects in taxes.
According to this Reuters timeline, in November 2009 Greece’s government projected that in the country’s national debt would balloon to a record 124.9% of GDP in 2010 - by far the highest ratio of any eurozone country. On December 7, 2009, S&P put Greece’s “A-” bond rating on negative watch, and on December 8, Fitch Ratings slashed their own rating to BBB+ with a negative outlook – the first time in a decade that any rating agency assigned Greece a rating lower than A. Standard & Poor’s quickly followed suit by lowering its rating of Greek debt to BBB+ on December 16. Various stopgap measures were proposed, including tax hikes on tobacco and fuel, VAT increases and abolishing bonuses at state-run banks. Unfortunately, none of these were enough to ward off the inevitable. On April 27, S&P downgraded Greek bonds to BB+, or “junk” status. As of May 4, the UK’s Guardian revealed that investors “doubt whether the €110bn bailout will actually solve Greece problems.”
Greece’s struggles have sent ripples through other seemingly unrelated countries. Bringing the hammer down on Greece’s debt inspired ratings agencies like Fitch and S&P to examine more closely the finances of Portugal. As CommodityOnline.com explained in late April, Portuguese bonds were downgraded two notches once Greek debt became junk. In truth, Portugal’s finances have faced growing scrutiny throughout 2010 for largely the same reasons: concerns over its ability to repay existing debts and sustain spending at current debt-fueled levels. More than a few analysts and world leaders “worried that [Portugal] might be the next week link in the Eurozone after Greece.”
Portugal’s recent financial reports aren’t pretty: a 2009 budget deficit of 9.4% of GDP and outstanding debts totaling 85% of GDP. In February 2010, the UK’s Telegraph reported that credit-default swaps measuring the risk of Portugal defaulting on its bond debts “surged 28 basis points on Thursday [February 4] to a record 222″ amidst reports that prime minister Jose Socrates was about to step down. Parliament minister Jorge Lacao, remarking on the inability of Socrates to pass needed austerity measures, said that “what is at stake is the credibility of the Portuguese state.” While various studies have concluded Portugal and Greece need to immediately cut spending by 10% or more, the mere idea of doing so has triggered mob violence.
Spain is another country whose financial future is intertwined with those of Greece and Portugal. The Spanish economy has been nothing short of abysmal since the global financial meltdown took hold. CNN noted in late April that unemployment had reached 20% (second only to Latvia for highest unemployment of any eurozone country.) Worst yet, the entire economy shrank by 0.1% in the fourth quarter of 2009. It was the seven consecutive quarter of negative GDP for Spain.
On April 28, Standard & Poor’s reduced Spain’s long-term bond rating to “AA” from “AA+ because of “risks to budgetary position.” When pressed for an explanation of the downgrade, S&P credit analyst Marko Mrsnik stated that “the Spanish economy’s shift from a credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed.” Moody’s economist Andreas Carbacho-Burgos told CNN that Spain “has been in the doldrums” for several years and they were “not sharing in the output recovery that was happening in Germany, France and Britain.” The Telegraph quoted Nobel economist Paul Krugman saying that Spain, not Greece, was the real “trouble spot.”
Ireland’s struggles, too, are contributing to fears of a contagion in Europe. To its credit, Ireland has been far quicker than the others to take hard, but necessary corrective action. While foreign leaders allowed themselves to be paralyzed by public protests, Ireland was among the first nations to cut government spending and raise taxes. Sadly, it appears that might be too little, too late. The New York Times reported on May 20 that Ireland will run one of the world’s highest budget deficits (11.7% of GDP) during 2010. A lack of new economic growth is inhibiting the positive effects of the spending cuts and tax hikes. Excluding the profits of foreign residents (which are taxed lightly in Ireland), 2009′s deficit looks more like 17.9% of GNP, and could be as high as 14.6% for 2010.
The rest of the world has an enormous stake in whether of not these countries resolve their problems. In the third and final installment of this series, we’ll look at potential consequences to other countries (including the United States.)
Read the first installment in our European Spotlight series here.