By: Dr. Mike Campbell
The sovereign debt crisis was triggered by the concern that Greek could not honour its obligations. This was due, in part at least, to the fact that the previous administration had misreported the nation’s financial position and the reality was much worse than they had suggested. That led to the credit ratings agencies moving to downgrade Greek debt (making it more expensive for the Greek government to raise funds) to reflect the fact that there was a higher perceived risk to an investor purchasing Greek debt.
In turn, the ratings agencies cast their beady little eyes on Spain, Portugal, Ireland and Italy, all of whom had substantial public debts – in common with just about every major (democratic) economy. A case of jitters ensued. What would happen if one of these Eurozone economies should be unable to service its debts? The consequence was that the nations in question had to offer more generous terms to get their bond issues off successfully. As a knock on effect, speculators turned against the Euro which lost value against the Yen, the Dollar and Sterling in an episode known as the Sovereign debt crisis.
In the last week, the Irish, the Portuguese, the Spanish and the Greeks have all issued government bonds, of varying duration, which have been enthusiastically swallowed up by the market. The Portuguese raised €750 million; the Irish €1.5 billion; the Spanish a whopping €7 billion and Greece €390 million. However, the Sovereign debt crisis has left its mark in terms of the higher yields that these “problem nations” need to offer on their debt. They are having to pay a 3%+ premium over the rates that Germany needs to offer to attract investors to its bonds. Given that the chances of a sovereign debt default are wastingly small and the interest on offer from central banks is at an all time low, it is hardly surprising that these issues are always heavily subscribed.