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Greece's Debt Crisis: What's in Store for the Rest of the PIIGS?
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By Nathaniel Williams
Thu, 29 Apr 2010 14:00:00 ET |
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Can you imagine the chaos that would erupt if T-bill rates were to rocket from 5% to 19% in one month in the U.S.?
Something close is happening right now in Greece, Portugal and Spain -- and the contagion is spreading. EWI's analysts have been keeping their subscribers one step ahead of the curve of this sovereign debt crisis for months.
Excerpted below is some of EWI's prescient analysis about the growing crisis in Europe. As you'll see, the analysis describes what's happening in Europe now -- three months ago.
High levels of global debt are both financially debilitating and deflationary because they commit scarce cash to servicing interest payments. Up until now, most sovereign credit defaults occurred in emerging-market countries, such as Argentina and Russia. The deflationary tide, however, is starting to lap up against more developed Eurozone economies.
The chart shows the value of credit default swaps -- an instrument similar to an insurance contract that pays holders (if they are lucky) in the event of default -- for Greece, Portugal, Spain and France. In recent weeks these contracts have soared, with credit-default swaps on Greece’s and Portugal’s debt already surpassing the January-March 2009 extremes established in the latter part of Primary degree 1 down.
Obviously, the market is growing more skeptical that Greece can pay its debts, so the cost of protecting against default is rising fast. Greece’s budget deficit is 12.7% of gross domestic product, and Portugal faces a budget shortfall that’s more than twice the European Union’s limit. Traders are now buying default protection on sovereign debt at a rate of more than five times that of specific company bonds. “Greece’s neighbors would ‘step in’ to prevent a debt default to avoid ‘a problem for the whole of Europe,’” a Tokyo-based bondsalesman says. Maybe so, but who will step in to bail out Portugal, Spain, the next sovereign default or the one thereafter?
The world is running out of money to service its mounting debts, and this chart simply depicts the front edge of the next great wave of credit contraction, which will sweep into more established countries throughout Europe and eventually to the United States.
Tags: Sovereign Debt