I am sharing some thoughts as published in Anand Rathi Commodities Journal about The European Financial Crisis.
Is it Over ?
Certainly not yet, mistrust is contagious and it spreads faster. The current problems faced by Greece are not unique to that nation but many other members of Euro zone (EZ) share similar problems. Unfavourable demographics, rising fiscal deficits, lower savings and lower productivity are common with varying degree of intensity among these nations which share common currency.
Both Greece and Portugal are rather small, but if the markets find reasons to doubt the long term sustainability of much bigger economy like Spain, then the amount required for a bailout would be a very big number, that we do not see that much of political will to put up such an amount.
Spain is much larger economy, but saw a worst housing bubble burst and fell further when the recession hit. The unemployment soared to 20% one of the highest in EZ and still raising. Spain has much less debt to GDP ratio, but still it needs to get the things right and faster. The total debt maturing till Dec ’11 for the Spain comes up to €83.8bln which is twice that of Greece. And more debt is spread among these nations holding each others debt which would take the amount of debt much higher.
Italy the other large economy having deep structural problems. The budget deficit stands at 5.2% of GDP and the holds a debt of 115% of GDP, but it is €286bln, nearly 5 times that of Greece. It is also implementing a savings drive to bring the deficit to 2.7% levels by 2012, but that is not easy to implement austerity drive while coming out of a nasty recession, still it is trying and hoping that things would fall in place.
We are at the beginning of a huge debt expiry schedule for these European nations, and there is huge debt coming up for the rollover in the months ahead. And any doubts on these countries financial ability to pay off the debt or roll over it, the same cycle would be repeated, this time with much high magnitude and pace. The debt of these troubled nations cumulatively would peak in the months between June to August this year, and a huge debt is scheduled for Iceland in Dec’11. So it’s not yet over.
