Perspective on Europe

The following chart demonstrates the serious threat of budget deficits to the European Union. The chart shows the percentage of GDP in 2009 that each country contributes to the EU.

We can see a clear trend in this chart. The sovereign debt contagion is spreading from countries with a small share of the EU GDP like Greece and Ireland to larger ones like Belgium and Spain. Even Italy is being affected by higher rates, and it has an economy 50% larger than Spain's.

The issue for Spain is not so much one of extreme levels of sovereign debt, but with a high budget deficit (9.7% of GDP) there is concern whether it can rollover its maturing debt in 2011.

Spain needs to rollover 120 billion Euros of maturing debt plus finance its budget deficit for 2011 projected to be another 70 billion Euros.  Total debt needing financing in 2011 - 190 billion Euros or about 18% of Spain's GDP.

Currently, it seems unlikely that Spain will be able to afford to rollover this amount of debt if the bond market demands higher yields.

One could argue that Spain is "too big to bail".

From the UK Telegraph quoting a German academic:

"'Germany cannot keep paying for bail-outs without going bankrupt itself,' said Professor Wilhelm Hankel, of Frankfurt University. 'This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.'

"Adjusted for demographics, Germany is already one of the most indebted nations in the world."

Consider these quotes:

From Elliot Wave International quoting the New York Times:

"...the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.

"Analysts fear that at some point — no one knows when — investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones..."

New York Times (Dec 5, 2010)


From Elliot Wave July 2010:

"According to the Center on Budget and Policy Priorities, state budget deficits will balloon to nearly $112 billion in the next year. The projected deficit undoubtedly understates the predicament, as it assumes a continued economic recovery. As the economy turns south again, state and local governments will contribute powerfully to the slide. With $787 billion in federal government stimulus spending winding down, unemployment waxing and depressed residential real estate values being joined by commercial real estate declines, the tax take by state and local municipalities will shrink like never before."

The sovereign debt crisis is rapidly coming to a conclusion.  How the defaults will unfold and whether we will see a currency crisis remains to be seen.