To get an idea of the debt crisis faces the euro have a look at this table from here giving the debt refinancing and deficit financing requirements of the PIIGS countries for the next four years. The required amount is close to $2 trillion and it is suggested that a full bailout could come to close to $1 trillion.
To get an idea of much money is needed to keep these countries going a picture of a trillion dollars in €100 dollar bills is below the fold.
And the PIIGS need two of these!
There has been a minor kerfuffle over the past few days about the payment of pensions to former Ministers, most notably our current EU Commissioner Máire Geoghegan-Quinn.
Today Labour have announced plans to introduce legislation aimed at changing the current regulations. From RTE:
The Labour Party is to draw up legislation to ban the payment of ministerial pensions to serving politicians.
This afternoon, Labour leader Eamon Gilmore said their legal advice was that there was no constitutional impediment to such legislation.
I have just one minor issue with this. Shouldn’t we wait to pay pensions until people are actually retired (i.e. over 65).
Not wanting to pick on anyone, but just to give an example, Ivan Yates has been in receipt of a ministerial pension since 1997. Ivan Yates is 50 and has been receiving this pension since he was 37. Ivan Yates did not retire when he left politics in 2002. He is managing director of Celtic Bookmakers and has a fairly successful broadcasting career.
I have no problem giving Ivan Yates a pension for the service he did as Minister for Agriculture. But surely we should wait until he is retired before we pay this deserved pension.
UPDATE: Unknown to me, Ivan Yates actually addressed the issue of his Ministerial Pension on The Breakfast Show on Newstalk this morning which he co-presents. A copy of the piece is available here.
The continued fall in the price of Greek bonds continues unrelenting today. The yield on 2-yr bonds has now reached an incredible 15%.
This means that if you bought €1,000 worth of 2-year Greek bonds you would expect to receive about €1,300 between interest received and principal repayments on maturity of the bonds. This would obviously depend on how long the bonds have to maturity and the figure given here assumes that this is close to two years.
Most of this return will be based on getting the principal back as existing Greek bonds have a coupon rate of around 5%.
Turning €1,000 into €1,300 in just two years is a great return. The reason for this is that there is obviously a great risk. Greek bonds are cheap because markets are doubting the country’s ability to meet the interest and, in particular, the principal repayments.
Some firm numbers are given in this piece. To buy €1,000 of a 4.3% Greek tw0-year bond due in March 2012 cost €786.70 just before the close at 5pm today. Spend less than €800 to get €43 a year in interest and €1,000 principal in two years time.
Would you be willing to take the risk? Felix Salmon is not. At 15% I think it may be worth the risk. The EU couldn’t let Greece default. Could they?
Ratings agency Standard & Poors have cut their rating of Greek sovereign debt according to Bloomberg:
Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time that’s happened to a euro member since the currency started, as contagion from the nation’s debt crisis spread through the bloc.
Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The Greek move came minutes after the rating company reduced Portugal by two steps to A- from A+. The euro weakened, stocks plunged and the extra yield that investors demand to hold Greek and Portuguese bonds over German bunds surged.
With talk of sovereign debt defaults abound, it is probably useful to consider the impact of such defaults. The Economist provides some useful insight into this from one of their recent Economics Focus pieces. They suggest that defaults aren’t catastrophic at all. The piece is here and this is a short extract.
Defaulting does affect the cost of funds to a country. A study in 2006 by a trio of economists at the Bank of England found that countries which defaulted between 1970 and 2000 had both a higher bond spread and a lower credit rating in 2003-05 than countries with the same debt-to-GDP ratio which did not default. In their study Messrs Borensztein and Panizza show that having defaulted is associated with a credit-rating downgrade of nearly two notches. Using data for 1972-2000, they also find sizeable jumps in bond spreads after a default. In the first year spreads widen on average by four percentage points. This additional cost declines to 2.5 percentage points the year after. These figures may understate the pain, however: as the Greek case shows, worries about default are enough in themselves to lead to an extended period of high spreads.
That said, markets appear to have short memories. Only the most recent defaults matter and the effects on spreads are short-lived. Messrs Borensztein and Panizza find that credit ratings between 1999 and 2002 were affected only by defaults since 1995. They find that defaults have no significant effect on bond spreads after the second year. This tallies with earlier research by Barry Eichengreen and Richard Portes. Studying bonds issued in the 1920s, they also found that recent defaults resulted in higher spreads but more distant ones had no effect.
In a piece from Bloomberg, Ken Rogoff says that there is a 50/50 chance that Greece will not be the only bailout required in the eurozone.
Greece is unlikely to be the last euro nation to need an International Monetary Fund bailout, with Ireland, Spain and Portugal “conspicuously vulnerable,” said Harvard Professor Kenneth Rogoff.
“It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three years,” Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. “The budget cuts needed in Europe in many countries are profound.”
At 14.3 percent of gross domestic product, Ireland had the euro region’s largest deficit last year. Greece’s was 13.6 percent, Spain’s was 11.2 percent and Portugal’s 9.4 percent.
The likelihood is “better than 50-50” that others in the 16-nation euro area will end up requiring help from the Washington-based lender, said Rogoff, 56. He expects the IMF will eventually dispatch more loans to Greece than the as-much- as 15 billion euro it’s currently offering.
See how yields on 2-year Irish government bonds have been faring here. Check out screen captures of the Daily and Monthly graphs. Just today 2-year Greek bond yields have shot up to 13% and can be followed here with daily and monthly screen captures.
The FT have a quote that “this is the highest yield on short-dated government debt in the world”. Higher yields mean the perceived risks are increasing. More doubts here and less concern here.
