It's Not Just Greece We Should Worry about. the Problem Is Sovereign Debt
McRae, Hamish, The Independent on Sunday (London, England)
I am afraid that Greece is not just back in the headlines but will remain so for many months to come. There are a host of other vital global issues in the world of economics here, in the US, elsewhere in Europe and in the emerging world. But the consequences of Greece's difficulties are such that what happens in this one, small, interesting, troubled, but in many ways delightful country will shape what happens not just in Europe but in much of the developed world. At best, we get a patch from the EU, pushing the problem forward a few months.
The reason is concern about sovereign debt: what happens to countries that either cannot repay their debts as they fall due, or depreciate their currencies so that people are repaid in currency worth much less than the original money in which the debt was accrued?
Greece's debts cannot be repaid at face value. In that sense the protesters in the streets of Athens are right, though their opposition is not of itself coherent. So if debts cannot be repaid, and the latest projections still leave Greece with an impossibly high debt-service burden, the question is how the debts should be forgiven. Forgiven? Well, yes, because just rescheduling them to push them further into the future does not cut the eventual size of the debt. Indeed it makes it bigger.
But if a country cannot repay, then no one will willingly lend to it. So the nominal interest on existing debt has shot up, and not just for Greece. The main graph shows the rates on existing 10-year debt for Greece, Ireland, Portugal, Spain and Germany. Three years ago the rates were pretty much the same. At that time the markets believed that Greece was almost as safe a country to lend to as Germany. Even in the autumn of 2009 Greece could borrow at around 5 per cent. That judgement now looks absurd. Since the price of the debt declines as the yield rises (the two are the mathematical inverse of each other), those who bought the debt then would have lost roughly three-quarters of their money.
Unsurprisingly such lenders are none too keen to lend more, nor could the Greek government afford to pay such a rate on new debt. The effect is that the markets are closed to Greece, as well as Portugal and Ireland. The only places they can go for money is the European Union and the International Monetary Fund. Spain did manage to raise some sort-term funding last week but at around 6 per cent, and I suspect that were it to try to raise longer-term funds it too might find the rates prohibitive.
So you see the way in which the Greek problem is affecting the other weaker eurozone members. But will it affect the stronger ones?
It is difficult to make a judgement. All one can say is that some people in the markets are reluctant to lend longer term not just to Spain but to Italy, Belgium and Austria. These countries have always been able to borrow freely, but people are worrying that a few years down the line they too may find their debt burdens too high to handle.
Would-be investors look, for example, at the age structure of the Italian population and wonder whether there will be sufficient people of working age to service the debts that have been accrued. Unthinkable? Well, it was unthinkable three years ago that Greece, Ireland and Portugal would be in their present mess.
There has been a collective loss of self-confidence among the lenders. That has not happened to Germany or indeed to the UK. Germany has consistently been disciplined about its national finances while we are perceived to have a responsible government determined not to allow the debt to go on rising beyond 2015. The US is in a special position as the supplier of the world's only reserve currency, but the worries there have shown up in a steady depreciation of the dollar against most other currencies.
The wider the sovereign debt concerns spread the greater the danger that countries currently seen as completely sound may suddenly find themselves struggling to raise funds. …