Wednesday, April 27, 2011

Problems of Tackling Debt

The EU is unfortunately proving a very clear example of how difficult it is to solve a budget deficit during a recession by austerity measures.

Greece has implemented severe spending cuts, but the recent budget deficit was bigger than expected at 10.5% of GDP.

The Greek government explained the higher than anticipated debt was: "mainly the result of the deeper-than-anticipated recession of the Greek economy that affected tax revenue and social security contributions," WSJ

Bond yields on Greek debt continue to reach record levels. Two-year Greek government bonds rose Tuesday to a euro-era record of 22.48%

Ireland once held up as model of austerity is having similar problems. But, the spending cuts, haven't stopped markets pushing up interest rates to double figures.

Rates on Irish Bonds

Source: Confidence Fairy - Krugman

The Irish economy contracted 2.1% last year, shrinking 1.6% in the last three months of 2010 (Business Week)

Ireland is experiencing deflation and unemployment over 10%. Unfortunately, there is little help from the ECB, who seem still concerned about the spectre of inflation and are threatening to increase EU interest rates.

The UK has a little more room for manoeuvre, with an independent monetary policy and exchange rate. However, don't be surprised if later the government reports lower than expected tax revenues due to weaker economic growth.

The EU countries in difficulty have few options in dealing with their crisis. But, debt restructuring increasingly seems like a necessary step, despite EU promises to avoid restructuring (asking bond holders to accept a capital loss)


1 comment:

Same Day Loans said...

For too long European governments have been over spending and with the global recession it has caused big problems. Unemplyment and rising prices are putting a lot of pressure on every day Europeans. With many finging it difficult to last until payday.