Ireland’s taking the bailout from the European Financial Stability Facility, put together by the European Union (EU) and International Monetary Fund (IMF) when Greece was in trouble this summer, brought little comfort to the global markets. If nothing else, it has actually elevated fears of government debt default. The alarm bells have gone off for Portugal and Spain, while risk premiums, insuring the bondholders of Irish, Greek, Portuguese and Spanish bonds, have gone considerably higher. At the same time, you could say that the market mood has gone considerably darker.
By now, it seems there is little doubt that Portugal is next on the list of applicants for a financial bailout. But the really scary prospect is that Spain might need help, too, and that the debt situation there has reached the eruption point. If Spain indeed becomes in need of a bailout, at that point, the future of the Eurozone will be anyone’s guess.
Salvaging Iceland, Greece, Ireland and Portugal is one thing, as these are relatively small economies within the EU. But salvaging Spain could bring the Eurozone to its knees, because the German taxpayers cannot be expected to foot the bills for refinancing every European country that cannot manage its own finances.
Things are so bad that it matters little how terribly unfair they are, too. Unlike Greece, the Irish government’s recklessness was not the reason it almost went under. Instead, the country’s banks have led Ireland down the path to ruin. Irish banks have idiotically peddled cheap loans and amassed a mountain of debt that way. Portugal’s government has tried its best to rein in spending and tame its real estate market, and it still ended up going backwards instead of forwards.
In such sensitive and prone-to-overreaction markets, even a hint of bad news creates a ripple effect. The Portuguese trade unions will have muddled the waters further with their general strikes this week. What are they protesting? Austerity measures, of course, just like Greeks did.
Fears are swelling to the bursting point regarding the ability of Spanish banks to refinance their loans. This summer, coinciding with the Greek bailout, Spanish lenders experienced what interbank lending drying up means. In March and April next year, over 50 billion euros in Spanish government and bank loans will mature, requiring refinancing. However, right now, there is much doubt that Spain’s debt market will be able to deal with the volume when repo markets are deteriorating.
This potential tsunami of maturities appears at the core of Europe’s debt problems and it seems that each tidal wave is bigger than the last one. Take Greece for example. By 2014, Greece will need to pay back 28 billion euros to the EU and IMF. This means that at least by the end of 2013, Greece will need to borrow money in the public debt market. The only problem is that Greece not only needs to borrow 28 billion euros, but also additional money will be needed to service the maturing debt.
On the latter, Germany might come to rescue. Germany has fought and won the fight on bond haircuts, whereby any new bonds issued will have a covenant that implies that when the time comes for debt restructuring, bondholders will have to take a haircut if the bond defaults.
But haircuts do not deal with repayment of the rescue loans. At this point, there are no answers on how Greece, Ireland and Portugal will repay their rescue loans. Also at this point, no one knows for sure where this particular train is going and whether there is potential for it to get derailed. Finally, at this point, no one knows if this train is indeed heading for a six-foot-thick brick wall or when the crash will occur.