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.