The eurozone is on shaky ground.
European Union leaders will be meeting on Thursday to begin an emergency two-day summit as the region’s leaders attempt to localize and corral the European debt crisis.
Spain has formally requested emergency funds to help save its fragile banking system. It is unknown how much cash Spain is asking for, but about USD$130 billion is available. The overriding concern is if Spain collapses, it would likely send a ripple effect beginning in the eurozone and spanning globally since Spain was the 12th largest economy in the world in 2011, according to the International Monetary Fund (IMF). Before, Spain’s economy was the 9th largest, but was surpassed by Russia, Canada, and India in 2011. Australia is now also looking to catch and surpass Spain. (Read why Spain is facing financial chaos in “Why Spain’s in for Some Hurt.”)
The yield on the 10-year Spanish bond hovered at 6.7% on Tuesday after recently trading over the critical 7.0% level. The yield has been on a steady upside move since trading around 5.0% in late February. This high yield is unsustainable and not payable by the government; Spain is broke so high financing costs are not desirable. Recall when Greece’s 10-year bond yield surpassed 7.0% and eventually was over 90.0% on fears of a country default before the IMF, European Central Bank, and European Commission came in with $146 billion in cash. Unfortunately, as we all know, it was not enough, as Greece had to ask for more funds just to make the debt payments on its initial loan.
In Greece, the situation remains unclear after a key member in the new coalition government, formed on June 17 to deal with the austerity program, resigned due to poor health. And there is heavy debate about Greece wanting a softening of the austerity measures, but this is meeting tough opposition from key lender Germany, which is facing its own growth issues. While the deal will likely go through, it’s only a bandage solution to a much more significant situation in which the mounting debt is crippling. With this amount of debt, a country is handicapped in its spending efforts to pump up its economy and GDP; hence, economic growth is negatively impacted. Unfortunately, this vicious cycle is realistic, and this will make it very difficult for the eurozone going forward.
So while Spain and Greece are the focus of the eurozone at this juncture, Italy is also worrisome, as the country’s 10-year bond yield trades just over 6.0% and has been edging higher since the 4.9% range in early March. Yields had been over 7.0% in late November 2011. Trust me, Italy may soon be coming to the money tree and asking for funding.
Where does it end? Notice the trend here?
And now Cyprus, a small country island to the east of Greece, has asked for financial help. With public debt at around 50.0% of GDP, Cyprus needs funds, just like Greece. Cyprus’s GDP was ranked 94th in 2011, sandwiched between the powerhouses of Turkmenistan at 93rd and Bolivia at 96th. While Cyprus is insignificant as far as its impact on the eurozone, the fear is that we could be seeing further debt issues surface in the eurozone down the road.
The eurozone risk remains a significant variable that will take time to resolve.
There’s still a sense of extreme uneasiness given the lack of a valid blueprint to fix the eurozone debt issues.