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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

Debt troubles spreading across Europe

I've written before about the congenitally high unemployment rate in European countries, a piece you can read by clicking here.

Today, two European nations -- Greece and Spain -- are experiencing serious debt troubles, raising concerns that could spread across the Continent.

Greece's credit rating is getting cut left and right by ratings agencies, thanks to some recent bad news.

The new socialist government revealed that the nation's deficit was twice as large as had been previously reported and would hit nearly 13 percent of GDP this year. This news sent the Greek markets tumbling and and made debt-holders and ratings agencies scream a collective, "Say WHAT?!"

Fitch downgraded Greek government debt on Tuesday, following a credit-watch warning by Standard & Poor's on Monday.

"We must close the credibility gap to survive as a sovereign and cohesive nation," Greek Prime Minister George Papandreou told a televised cabinet meeting. Though he no doubt meant this to sound reassuring, this is not what you want your prime minister saying. When your PM is using terms such as "survive" and "cohesive nation," you know you're in trouble.

As this is unfolding in Greece, the nation is being coincidentally rocked by social unrest, with thousands of people demonstrating, marking the one-year anniversary of a 15-year-old being killed by a cop. Troubles abound. Here's a good timeline detailing Greece's pain over the past year.

Greece is starting to look a lot like Iceland, which you will recall was one of the first sovereign casualties of the Great Recession. The nation's banks, teetering on default, were taking over by the government. Ireland, at one point called the "Celtic Tiger," flailed as well.

In Spain, where the IMF says unemployment will reach a shockingly high and Euro-leading 20 percent this year, debt is the problem, too.

The nation's deficit will hit 11 percent of GDP this year, according to the European Commission, and the outlook on the government's debt grade was lowered by S&P today, which already downgraded the nation earlier this year. The outlook was lowered from stable to negative.

Bonds all across and the Middle East -- and remember, this brush fire started in Dubai -- are in trouble, because investors are looking at the numbers and are coming to a conclusion: A number of European and Middle Eastern countries don't have the ability to dig out of this recession in a robust or steady way.

And here's how things could get worse in Spain: The government is considering raising its value-added tax and taxes on income from capital. This typically causes a flight of capital to more tax-friendly countries, so Spain could be taxing itself into a death spiral. Spain grew its way to prosperity over the past few years by a debt-fueled housing boom. Now, the bill is coming due.

Earlier this year, Ireland and Portugal both lost their top credit ratings.

As a side note, British Chancellor of the Exchequer Alistair Darling has decided to tackle the executive bonus culture by proposing a 50 percent super-tax on big bonuses that would be paid not by the employee who got the bonus but by his or her institution.

-- Frank Ahrens
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By Frank Ahrens  |  December 9, 2009; 12:57 PM ET
Categories:  The Ticker  | Tags: Dubai, Fitch, Standard & Poor's, debt  
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I notice you cite the ratings agencies a lot in this post. Is there any evidence they have made reforms since their disastrous performance in rating the various companies at the center of the financial meltdown? Should we trust their evaluations of countries like Spain and Greece? Are there other sources we could use to evaluate the financial health of a country?

Posted by: vhaufler1 | December 9, 2009 1:58 PM | Report abuse

Hi, vhaufler1:

You raise an *excellent* point. We know all three major ratings agencies -- S&P, Moody's and Fitch -- totally spit the bit by applying top-level credit ratings to securitized mortgages that were based on wobbly borrowers and unscrupulous lenders. They have been under a lot of political pressure to reform or at least become more transparent. Time will tell on that one. For now, they are *officially* the best we have, HOWEVER for a faster, clearer look at how the rest of the world thinks about a certain nation's debt, just look at the bond markets and who's buying what and at what rate. For much of the year, the bond markets have been telling us what S&P and Fitch are just now getting around to telling us about Greece and Spain.

Posted by: Frank Ahrens | December 9, 2009 2:17 PM | Report abuse

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