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business newsThe Eurozone Bankruptcy Queue
The risk of bankruptcy does not stop with Ireland and Greece; situations in Portugal, Spain and Italy have deteriorated as well.
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The global banking system that publicly went bankrupt during September 2008 prompting government interventions in the form of capital injections, buying of toxic assets, insurance of bad debts, and even outright nationalizations has started to bankrupt the states that bailed them out, starting with the smaller states with Iceland setting the ball rolling. This year the bailiffs came knocking on the doors of the eurozone club members, first with Greece and now Ireland requiring a eurozone bailout (German) to prevent debt default bankruptcy, where if one falls then soon would all of the dominoes tumble.The euro 200 billion bailout of Greece and Ireland is in the form of a series of loans set at a 5% interest rate, against which one can measure the relative credit risks in the market, as theoretically 5% should be seen as a cap with the view that market rates should be below the 5% bailout rate. However the bond markets are NOT responding positively to Ireland's bailout as they had done during May's Greece bailout, which is evidenced by the yields on 10-year eurozone sovereign bonds rising across the board:
Greece's 10-year yield continues to trade at a high 12% despite the euro 110 billion bailout at 5% because Greek bondholders continue to discount a highly probable eventual debt default/restructuring as a deflating economy has sent public debt to GDP soaring to 135%.
Ireland's yield has surged higher to stand at 9.2% following Monday's bailout low of 8%, again suggesting debt restructuring given depression-inducing public debt at 95% of GDP.
Portugal's yield has crept higher to a new credit crisis high of 7.1% from Monday's low of 6.7%, confirming that a bailout of Portugal at an estimated euro 40-80 billion is imminent for an uncompetitive economy carrying a rising debt-to-GDP ratio at 83%.
Spain's yield has now crossed above the 5% bailout rate to 5.2%, which suggests that the market is pricing in a bailout for Spain, which is not surprising given the exposure of Spanish banks to Portuguese debts; official debt is put at 64% of GDP but this does not fully take into account Spanish banks' bad debts that, as with Ireland, could easily send Spain's debt to GDP to well over 100%.
Italy's yield has trended higher to 4.42% putting Italy firmly in the queue for a debt crisis blowout given that public debt is already at 120% of GDP.
Belgium's yield rose to 3.7%, which illustrates an elevated risk as a consequence of the failure of the political parties to form a new government, and public debt is already at 100% of GDP.
The UK, while not part of the eurozone, has seen its 10-year yields continue to trend higher to 3.3%, marginally below the recent high of 3.4%. The lower UK yield despite Britain's huge debt mountain illustrates the flexibility afforded by being outside the eurozone as it allows Britain to continue to stealth default on its debts by means of printing money and inducing high inflation that the eurozone countries cannot do individually; i.e. the UK government prints money that it loans to the bankrupt banks at 0.5% to buy UK government bonds at 3.3%, hence the reason the yields are lower than the likes of Spain and Italy.This acts as a safety valve preventing outright bankruptcy, but the price paid is in high inflation, with the doctored official inflation measure of CPI at 3.2%, the more recognized RPI at 4.5%, and real inflation at 6%, as the following graph illustrates.
The CPI inflation trend is in line with forecast expectations as of December 2009 (December 27, 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%.)
France's yield at 3.14 illustrates that France still retains some room for maneuver despite being in the eurozone.
Germany, the primary funder of the eurozone bailouts and also the benchmark for where the eurozone debt collectively used to trade, saw its 10-year bund yields rise a little to 2.7%.
The Debt-Interest Spiral
Virtually all countries continue to run huge budget deficits well above the 3% limit/targets which ensures the total debts will continue to grow. This means if the economies fail to grow GDP faster then they accumulate debt, then debt as a percentage of GDP will grow even faster, thus triggering an out-of-control debt-interest spiral as warned of in December 2009 (December 3, 2009 -- Britain's Inflationary Debt Spiral as Bank of England Keeps Expanding Quantitative Easing.)
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