Euro stress


               It’s been a bad few days for some European government bonds. New alarms in the market have arisen, as investors fear that some countries may have to reschedule or reduce payments to bondholders.

                 Germany can borrow ten year money for around 2.4%. Greece has to pay nearer 11.5%, and Ireland more than 8%, following recent market movements.  Portugal’s rate is around 6.9%.

                  The losses on these Irish and Greek  bonds in recent days may be a headache to some European banks, who own these bonds. It is certainly a headache for the countries concerned. As they come back to tap the markets for more money, so they will find the interest bill surges again, squeezing out more desirable forms of public spending. I notice that commentators who were sceptical of the UK’s government insistence that the deficit needed to be tackled have gone very quiet about the plight of the oevrborrowing Euroland members, now suffering from the cost of too much debt.

                The European Central Bank itself is not very happy about the situation. They have offered some support by buying up some of these government bonds, to try to stablise prices and limit the interest rate increases. So far it has not worked. There would need to be a much more concerted effort, doubtless paid for by  the  now usual process of the Central Bank creating the money to pay for the bonds. This in turn would weaken the Euro and make the weaker countries a bit more competitive, at least in the short term, intensifying the race to the bottom in currency markets. Alternatively the stronger  Euro member states would have to go to the rescue of the troubled states more whole heartedly, offering grants, cheap loans and other subsidies to tide them over whilst they try to adjust their spending and their economies.

             The problem for the peripheral Euroland economies is now most serious. Without economic growth they cannot get out of their debt trap easily, if at all. All the time they have to cut and cut again, and all the time they have to accept the exchnage rate that the stronger countries think appropriate, the recovery is further delayed.  There will be more stresses and strains ahead. There will be tension between the ECB and the stronger member states. I suspect the ECB will emerge with a wider range of powers, and will become the engine for trying to fine tune the running crises in the heavily borrowed countries.


  1. lifelogic
    November 10, 2010

    Rather like Major’s the predictable ERM farce in fact.

    So these countries finally sacrifice control of their own affairs and their democracy to boot. This was virtually inevitable due to the design of the single currency system. The EU people are really quite clever at waging war by other means.

  2. Stuart Fairney
    November 10, 2010

    Interesting how countries “reschedule or reduce payments” Try that with your credit card or mortgage, see where it gets you.

    They simply can’t pay their debts that they themselves took on. A more damning condemnation of mismanagement I cannot imagine.

    1. Alan
      November 10, 2010

      By devaluing the currency the government has reduced the real value of payments on credit cards and mortgages.

      The great thing about devaluation as opposed to default is that hardly anyone notices. The bad thing is that those of us dependent on savings and pensions lose as well as those who made the foolish loans in the first place. However those who notice this are very much in the minority, so governments will go on devaluing when there is a (usually short-term) advantage in doing so.

  3. Nick
    November 10, 2010

    Same with the EU. Both the Tories and Labour have racked up the debt. You’ve both engaged in a fraud when it comes to accounting.

    e.g. Civil service pensions are still off the books. Why? They are contractual obligations. Unlike the state pension which is why you’ve started the default there.

    So that adds another 1,300,000,000 pounds on to the debts.

    You’re right Ireland is bust. Basically Germany and France are trying to defend their banks. They are sitting on vast amounts of such debts. Same with Greece Portugal and Spain. If one goes they all go, and so do the banks in Germany and France.

    So the current game plan is to screw these periphery economies over, to protect the homeland. All it takes is for one of them to have the stomach to default, completely. Quite what they are going to do then.

    In the process their deficits can be managed and will be within EU rules. 🙂

    1. Alan
      November 10, 2010

      I wish civil service pensions were indeed contractual obligations that had to be honoured. The method of indexing mine has just been changed (after I have retired so there is not much I can do to make up the difference). Making retrospective changes to financial obligations ought to be illegal, for governments as well as private sector pension providers.

      However I do agree with you that all government debt should be on the balance sheet. But don’t put public service pensions on the balance sheet at the rate they would cost if the government had to buy annuities, since it does not.

    2. APL
      November 10, 2010

      Nick: “If one goes they all go, and so do the banks in Germany and France. ”

      Problem is Nick, the UK has entered into currency swaps with Euro zone countries, we are exposed too.

      Here is a thought, for the last thirty years since in fact 1973 when Heath sold the UK to the European Union, the people of the United Kingdom have not been governed according to their laws or customs – Brussels has imposed through the vichy government of occupation in Westminster its writ.

      The British people should tell Brussels, and the 650 or so in Westminister – here you are, you ran this debt up, it’s yours. You and your children can pay it off. Good bye!

  4. EJT
    November 10, 2010

    There have just been regional and municipal elections in Greece. Average turnout was 50%, in some areas abstention was at 2/3 rd of the electorate. ( Greece normally has quite respectable turnouts. ) This is people giving up on the political process. What happens next may not be pretty.

  5. Denis Cooper
    November 10, 2010

    Interesting piece about Ireland on Newsnight last night. Being the BBC the story started with the excessive boom, not with the decision to join the euro which largely caused the excessive boom.

    Allister Heath gets it right in this article, “Stupid policies have destroyed Eire”:

    “Ireland’s first error was to join the euro; its second was to guarantee all bank creditors. These two errors have destroyed the country. Joining the euro led to an immediate halving in interest rates and a surge in growth and inflation – had Ireland retained an independent monetary policy, its currency would have soared and it would have jacked up interest rates. Plenty of countries have suffered a property bust – only some have been bankrupted as a result. Not all were euro members, of course, but those peripheral economies that did join are all now in terminal crisis.”

  6. StrongholdBarricades
    November 10, 2010

    As I have eviously mentioned I do believe that there needs to be a much more credible response to the Celtic Tiger on our doorstep and its current troubles.

    Open borders mean many things, and the Irish are already renowned for their ability to move to seek work elsewhere.

    The solution I believe needs to be one which ensures the integrity of Ireland, and minimises the fallout across the border. I note, however, that you yourself do not postulate an outcome.

    The social divides are already marked, and by the markets own reckoning it has to get much worse before it can begin to improve. The whole of the UK might feel the wind from the collapse of the state so close to us, and if they ask us for help, are we duty bound by historical ties to leap to their aid?

    1. Mark
      November 11, 2010

      As I hinted here recently, the solution may be to buy up Ireland’s empty bubble properties (some 600,000 new dwellings) and use them as housing for some our benefit recipients (the trick will then be to find some useful employment for them). Unless there is a population to occupy those dwellings they will decay and be pulled down, completing the folly of building them – so the value becomes zero, or even negative after disposal and remediation costs.

      If the Irish emigrate to try to avoid the consequences of their economic woes the country would be set back as if after the Potato Famine of 1845-52. Of all the PIIGS, the Irish are likely to be most mobile given their history. We could be faced with having to invoke emergency refugee powers to deny normal EU migration rights to avoid a crisis in the UK.

  7. A.Sedgwick
    November 10, 2010

    Auditors have refused to give the European Union’s accounts a clean bill of health – for the 16th year in a row – DM today.

    Added to the spurious hysteria over so called government cuts, further evidence I must living in an economic parallel universe.

    1. sjb
      November 10, 2010

      “For the third year running EU’s annual accounts have received a clean bill of health from its external auditors. ”

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