Eurozone debt: Good money after bad?

BBC business editor Robert Peston on the eurozone's financial and economic woes

Stephanie Flanders and I have written four short essays on the eurozone's financial and economic woes for Radio 4's PM. Here's the first of mine.


The great fear of any sovereign borrower - that's a government trying to borrow - is that one day its request for money will be turned down.

Which would be a disaster. Because like the rest of us, when a government can't borrow, it can't meet its financial obligations, such as paying civil servants' and teachers' wages.

So why would investors - such as banks, pension funds or ordinary savers - stop lending to a government? Well (to state the obvious) they might come to the harsh realisation that said government has already borrowed more than it can afford to repay.

Earlier this year, Greece came within a whisker of suffering just such a strike by its lenders - which would have bankrupted the country if other eurozone governments hadn't agreed a 110bn euro rescue package.

What made Greece particularly vulnerable was partly its huge hunger for new funds - its annual deficit - equivalent to around 10% of its GDP on average every year from 2009 to 2011.

Also it has to repay big existing debts, worth more than 13% of its annual GDP, its output, both next year and the year after.

So - perhaps understandably - investors increasingly worried they wouldn't get their old loans back, and were reluctant to provide even more debt. They saw Greece as the equivalent of a family whose main bread winner has lost its job but which maintains its lifestyle by borrowing, in the hope that something will turn up.

One consequence was that the price of Greek government debt or bonds plummeted, such that the implied interest rate on this debt soared to a punitively high 40%.

That was the moment when Greece was more-or-less bust - and had to be rescued by the rest of the eurozone.

But what about other European countries? Are any others at serious risk of being shunned by investors.

Well those with the biggest deficits are Spain, Portugal and Ireland - and they're certainly the countries viewed by analysts as most financially fragile.

But a slightly different picture emerges when old debt due for repayment is added to the requirement for new borrowing.

On this basis, Belgium, Spain and France all face serious financing challenges - they all have to raise money equivalent to about 19% of their GDP this year. And Italy has to find a similar amount both this year and next.

As for Portugal, it faces its biggest financing test in 2011.

By contrast Ireland looks much better placed, because it has very little old debt due for immediate repayment.

However, before you get carried away with the idea that these eurozone countries are kaput, it's as well to provide a bit of international context.

As it happens, both Japan and the US are this year financing and refinancing much more debt relative to the size of their respective economies than any eurozone country.

And yet they're perceived to be much less likely to face an imminent financial crisis.

How so?

Well Japan has a vast captive population of small savers, all keen to lend to their government, intermediated traditionally by the postal system (as it happens, Italy looks like the Japan of Europe, with a substantial national debt financed by indigenous savers, via the banks).

And at a time of global uncertainty, the US is still the place where risk-averse investors place their money - even if that's not especially rational.

The great paradox is that eurozone governments are typically the most sceptical about the benefits of global financial capitalism - and yet they tend to be more at the mercy of international investors than other rich countries.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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