The hugely interlinked and interwoven nature of the sovereign bond market in Europe was probably always going to suffer exceedingly badly if it ever became the focus of media attention. It is such a tangle of mutual indebtedness that it absolutely begs the comparison with one of those collapsing domino world record attempts one sees on TV from time to time.
One suspects that not even seasoned bond traders spend that much time stepping back from the sovereign debt game to look squarely at what a house of cards it all is. After all, even bond traders like to sleep at night.
The “Europe’s web of debt” graphic in the New York Times shows this web of indebtedness in all its glory, and it also makes evident why the EU is prepared to defend the euro with a $1 trillion support package. The web focuses on the PIIGS, Portugal, Italy, Ireland, Greece, and Spain, the so called peripheral euro countries and in reading it one has to bear in mind the relative sizes of each of the economies. Italy’s economy is said by some economists to have leapfrogged the UK’s economy last year, with France also passing the UK, which moved from fifth in the world’s league tables to seventh. So with a GDP currently somewhere in excess of $2 trillion, Italy’s whopping $1.4 trillion of debt is still better, expressed as a percentage of GDP, than the UK’s, which is somewhere north of 90% of GDP. The items to focus on though, are the arrows showing where the Greek and Portuguese debt has finished up. German and French banks hold $47 billion and $45 billion of Portuguese debt between them. German banks hold a further $45 billion of Greek debt, but the real stinger is France, which has been left holding $75 billion of Greek debt. Doubtless this was not entirely absent from the French President Nicholas Sarkozy’s mind when he allegedly banged the table and told the German Chancellor, Angela Merkel that if the EU failed to back Greece then there was no point to the euro and France would withdraw. That piece of histrionics is now rumored to be what clinched the $1 trillion EU support package for euro sovereign debts.
In its commentary on the EU support package [free registration required], the ratings agency Fitch points out that the package has to be seen against a particular backdrop:
“The budgetary and economic restructuring packages facing European countries with twin fiscal and current account deficits has raised investor concerns over the sustainability and policy framework governing the eurozone. The announcement of a package of financial support measures by the EU and IMF in excess of EUR720bn, and the decision by the ECB to purchase private and public (including sovereign) debt securities, has significantly eased near‐term financing risk faced by some eurozone governments. Moreover, the European Commission has drafted proposals to strengthen fiscal surveillance and discipline in the eurozone. Nonetheless, until governments are seen to be delivering on bringing budget deficits down—and economic recovery is secured—further episodes of volatility in government bond markets (and financial markets more generally) is likely.”
Other commentators have pointed out that while the ratings agencies might be more comfortable seeing governments getting stuck in to fiscal tightening and austerity programs, if they go at it too hard too early, that too, is very likely to blight the recovery and may well precipitate a double-dip recession. This really is a tightrope and the spectacle of top European politicians banging the table at each other is not going to help the balancing act, however well it plays in their own national media.
Further reading on sovereign debt and the EU
- Toward a Total Global Strategy, by George Yip
- Greek tragedy’s happy ending—A European Monetary Fund? by Ian Fraser [blog post]
- Greek tragedy harrows the euro, by Anthony Harrington [blog post]
- Is price stability the right target for the EU? by Anthony Harrington [blog post]
- Mixflation, by Giles Keating
Tags: EU , government bonds , PIIGS , sovereign debt