Marking the outbreak of the third wave of European debt crisis
Sweeping through the world and devastating the global economy, a financial tsunami reveals another side of the European economy, which is even more fragile than that of the United State. By the end of 2009, the national debt of Greece rocketed up to EUR 280 billion and her budget deficit constituted 13% of the GDP. In April 2010, when Greece announced that the country was teetering on the edge of bankruptcy, it rattled the global financial market and eventually unveiled the first wave of European debt crisis. With a view to gaining EU (European Union) and IMF(International Monetary Fund IMF)‘s emergency funds which amounted to EUR 110 billion, Greece voluntarily proposed cutting public wages, raising taxes and even a range of austerity measures of the sum of EUR 4.8 billion in exchange for funds in place as soon as possible. Fortunately, the crisis was quickly resolved.
Public debt standing highly at GDP83.3%
Don’t think that after a storm comes a calm; yet, it was just a lull before another storm for there was another storm of European debt crisis blowing again. After Greece, Ireland and PIIGS- five countries (Portugal, Ireland, Italy, Greece, Spain) had officially asked for EU and IMF’s bailout last year, Portugal earlier also requested emergency financial assistances from the related organizations with a “fastest mode” that eventually unveiled the third wave of European debt crisis and delivered a shock to the financial market. Notwithstanding Portugal’s overall deficit of 9.4% GDP ratio in 2009 was not at all an astronomical figure, the public debt was standing highly at 83.3% level of GDP by the end of 2010; meanwhile, Portuguese parliament’s rejection to the Prime Minister Jose Socrates’s austerity program also led to the resignation of Jose Socrates and hence to a political-economic turmoil.
Some data showed that recently the Portugal’s five-year credit default swap has jumped by 20 basic points, closing at 600 points; moreover, the yield of ten-year government bonds has once been approaching 10 per cent to 9.100 per cent level, which was just about the same as the 10.05 per cent level of Ireland. Portuguese bank Millennium’s Chief Executive Officer Ferreira expected that Portugal needed at least EUR12 billion of instant loans in order to redeem the principal and pay the interest of the sum of EUR 12 billion bonds due 15 April and 15 June. However, some analysts believed that considering the financing affairs in long run, Portugal would need at least between EUR 70 and 100 billion of short-term loans in order to meet the pressing problem. Since, at present, putting aside another batch of EUR 20 billion European bonds which is going to be auctioned in the market, Portugal only possesses EUR 4 billion cash reserves.
Next station of European debt crisis: Spain
The most worrying thing is that if Moody’s further downgrades Portugal’s credit ratings and then the ratings will reach a junk status, financial institutions around the world will certainly sell their Portugal’s bonds in hand for cash. At that time, Portugal will need to borrow a sum of EUR 1 billion principal of one year term with a more than 6% interest cost that will finally turn Portugal into insolvency in long run. Royal Bank of Scotland Group’s economist Cailloux pointed out that when Portugal became the third country in the Euro-zone asking for helps following Greece and Ireland, the market promptly shifted its focus to Spain who was also plagued with debt and becoming the forth European country in a row requesting assistances from EU under market speculations. Spanish Finance Minister Elena Salgado stated clearly that the financing problems of Portugal would not spread to Spain. It turned out that since January 2011, the risk premium, which was measured with the difference of yields between ten-year Spanish government bonds and German government bonds with the same duration, had already fallen by 30%, and therefore Spain did not have any financial pressure.
Facing the reality of heating-up inflation to 2.4% within Euro-zone in February, people in the market worried that an interest raise by 1/4 per cent to 1.25 per cent by the President of the European Central Bank Jean-Claude Trichet, would deteriorate the European debt crisis indirectly and indeed, it could be seen with the ultra-high yields of Portugal’s two-year, five-year and ten-year bonds. The prices of the bonds continued to decline but the interest rates related kept surging and even ranked first in the world. Therefore, given that the third wave of European debt crisis triggered by Portugal and the current nuclear radiation disaster in Japan would certainly drag down the pace of the global economy, it really deserves a high degree of attention and concern from governments and investors worldwide.