Debt Problems Linger in Europe: How are Greece, Ireland, Portugal, and Spain holding up?

Containing the Crisis

Track deficit levels across Europe. Click to enlarge.

Earlier this week, U.S. President Barack Obama hosted German Chancellor Angela Merkel in Washington DC. The key topic of discussion for the two leaders was the ongoing Greek debt crisis and how Germany, along with the other Eurozone countries, should act in order to contain the crisis and head off a Greek debt default. A proposal for a second Greek bailout package is currently in the works (Greece accepted a joint EU/IMF 110 billion euro rescue package in May 2010). The hope is that the package would prevent default, which could seriously undermine the euro and have negative knock-on effects for the tentative U.S. economic recovery.

The Changing Landscape for Aid

Following the start of the Greek debt crisis in April 2010, both Ireland and Portugal have requested international assistance in order to prop up their financial systems. Ireland received an 85 billion euro loan in November 2010, and Portugal was just given a 78 billion euro bailout in May 2011. The current proposal for financial assistance to Greece is estimated to be worth 80 to 100 billion euros. While everyone agrees that a Greek default would be bad for all of Europe, the tremendous cost of the combined rescue packages makes the Euro area member countries nervous.Germany in particular has played a major role in providing money for the previous bailouts and is demanding to see more evidence of reform before more money is lent.

The Effect on Credit and Long-Term Bond Yields

This scrutiny has reignited Greece’s problems in the debt market. Earlier this spring, pressure mounted from the country’s creditors, the EU and the IMF, to accelerate fiscal reforms and privatization programs. On top of this, Eurostat announced in late April that Greece’s government budget deficit exceeded estimates and had surged to 10.5% of GDP. All of this news pushed Greek long-term government bond yields up towards 16%, the highest yields seen since before Greece joined the euro. Not surprisingly, Irish and Portuguese long term yields have also moved higher in recent months.

Looking Ahead

The implementation of economic austerity measures has been a key feature of the bailout packages for all three Eurozone countries facing financial crisis. In the case of Spain, proactive efforts to institute financial reforms have actually helped the country to avoid a debt collapse so far. Spain is the fourth largest country in the Eurozone and their government budget deficit amounted to 9.2% of GDP in 2010, so their ability to reduce the fiscal deficit is being closely watched. The very future of the euro may depend on the ability of Greece, Ireland, Portugal and Spain to restructure their economies and avoid defaulting on their debt. Economies around the world will certainly be watching, as well.