2012 Euro Area Bond Yields

Compared to the beginning of the year, especially Greek and Portuguese, bond yields have come down quite a lot during the year. As is noted in the graph the Greek debt restructuring for Greek debt and the verbal commitment by the ECB president Draghi in July dampened the exit and breakup risk and hence brought down sovereign debt yields.

Where will the bond yields go in 2013?

The Economist

2013 Greek Budget: More Austerity

The Greek Government will again implement significant budget cuts in 2013, which it agreed on in November with the Troika. Pensions and state salaries are the main places where the cuts will take place. The reduction in the deficit consists for about 4/5th of budget cuts and 1/5 of tax increases. This total planned tax increases and budget cuts in 2013 are 9.4 billion euro's.

The reduced budget deficit will still increase the government debt however.

Note: the Greek parliament has approved the budget in November.

Greek Debt Composition 2012

One reason the Northern European countries bailout out Greece was because banks, for example German en French banks, heavily invested in Greek government debt. Since then the European Commission (EFSF) and the ECB have bought quite a lot of debt from the banks. This means that the bond holders of Greek debt shifted from only private parties to mostly public holders now.

This means that when there would be a second round of writedowns on Greek debt the European tax payer will have to pay as well.

Estimated Country Losses when Greece Leaves Euro

Nomura made an estimate of the losses when Greece would leave the Euro. The assumption they made is that the new Greek currency will devalue with 60% and the country will default with 75% on the still existing debt. As you can see in this case Germany will bear the greatest costs with 70 billion euro. France and Italy follow next. What has not been included in the costs, is possible contagion to the other Euro Zone countries in troubles.

Of course, this is just one of the possible scenarios.

Greece Economic Overview (May 2012)

Overview of the Greece economy (May 2012). Especially notice the consumer confidence and the collapsed new car registrations.

Government Debt And Deficit Euro Zone Members 2012 (Expected)

This graph from the Rabobank shows the fiscal positions of the Euro Zone members (orange) compared to the UK, US and Japan (blue). National debt is on the horizontal axis and deficit on the vertical axis. Numbers are expections from European Comission and IMF.

Notice that the U.S. and Japan have way worse fiscal positions than the Euro Area. Well known is that Greece and Italy have the biggest government debt compared to the GDP in the two economies. Ireland and Portugal are getting closer and closer to Italy though.

Greece Economic Overview (February 2012)

This graph from Reuters gives a great overview of the current economic situation in Greece. All the indicators are a lot worse than the Euro Zone average. Especially look at the unemployment rate, which recently jumped over 20 percent.

Greece Debt/GDP: Austerity Versus Economic Growth

This chart from Der Spiegel shows in a great way how austerity can make the Debt/GDP ratio bigger(!). When more austerity in the future makes the economy of Greece contract even more, the debt ratio as a percentage gdp (given the debt remains the same) increases, while austerity is implemented to make the debt ratio decrease. This is why it is important the Troika (Europe+IMF) - which currently is about ruling the Greek government - needs to look at the trade-off between austerity and economic growth every time it evaluates the Greek economy.

Der Spiegel

PIIGS Refinancing Per Year (-2014) and Per Month (-2013)

When government bonds expire governments have to issue new bonds to keep financing its debt. Normally this is not a problem when interest rates stay about the same rate. For Ireland, Greece and Portugal the interest rates have been rising since last year to unpayable highs. Thats why they are financing its debt through the EFSF and the IMF at the moment. The interest rates for Italy and Spain have been rising lately as well.

Together these five countries (debt redemption, interest payments, primary balance deficits and bank recapitalisations) have to lend 1500 billion euro's in the next three years.

This graph shows the refinancing needs for these countries in the next 14 months.

ZeroHedge

Greek Bond Yield Roller Coaster (1993-now)

This graph from Der Spiegel shows the wilde ride of the 10-year Greek Government Bond yields. After the ratification of the Maastricht Treaty in anticipation of the introduction of the euro in Greece yields started to fall dramatically. Yields remained low until the Greek government announced the budget figures were significantly higher than previously reported, end 2009.

Greece Decision Tree

The BBC posted a decision tree for the future of the Greek Crisis. On the top with what will happen at the end of October, whether Greece will meet the austerity demands. It probably won't, but then the question is does the Troika (IMF, ECB and EC) have enough confidence Greece will take more measures to get the targets. If it does the Troika will release the sixth tranche of the first bailout money, if it doesn't Greek banks (and banks around the world which have a lot of Greek Debt) and/or Greek government workers are in trouble.

BBC

Number Of Times Euro Zone Countries Have Broken The SGP

This graph from the Dutch 2012 budget which has been presented yesterday by the finance minister shows an interesting insight in the number times countries have violated the Stability And Growth Pact. The Stability and Growth Pact says that countries in the Euro Zone can have a budget deficit of at max 3 percent and a maximum government debt of 60 percent. Greece has, as you might have guessed broken the SGP the most times, but Ireland and Spain are, maybe surprisingly, clear winners.

Translation: Saldo (dark green = deficit) and Schuld (light green = debt).

Countries: Belgie = Belgium, Ierland = Ireland, Spanje = Spain, Nederland = Netherlands, Duitsland = Germany, Franrkijk = France, Italie = Italy, Portugal = Griekenland.

World: Safest Versus Riskiest Government Debt

This graph from The Economist compares two-year government debt bond yields in the world. On the left side the riskiest bonds are listed (with the highest interest rate) and on the rate sate the safest bonds. Notable is that two out of three of the three countries that have riskiest government bonds are in Europe. The three safest countries are in Europe as well.

Due to a request by the Economist this graph has been removed. 

View the graph here

Greek Debt/GDP: Only 22% In 1980

This graph shows the government debt to GDP ratio for Greece. As you see the debt was mostly accumulated in the eighties. I will sum up some of the events which are of most importance this this graph:

• In the 1980's spending as a percentage of GDP rose by 19 points from 24% in 1980 to 43% in 1988, while revenue rose by only 7 points form 20% to 27%.
• In the beginning of the 90's Greece was in recession twice (1990 and 1993). The deficit and the borrowing cost both spiked to over 10%. 
• Starting in 1993 the government started a policy of fiscal consolidation to get permission to join the Euro-Zone. The deficit shrank to 3% of GDP and the borrowing costs fell to just 6% in 2000.
• When Greece was allowed to enter the Euro-Zone the 'fiscal discipline' faded away and budget deficits began to rise again. This was not followed by higher borrowing yields though, which may had something to do with the distorting of the numbers by the Greek government.

Greek Default Watch

How Will Greece Use The Second Public Bailout Money?

On the 21 of July Euro Zone leaders announced that Greece will get a second public bailout from the Euro Zone Countries (Lend by the EFSF bailout fund) and the IMF. The second bailout amounts 109 billion. This graph shows how the second public bailout out money will be used by Greece:

• 34 billion to refinance its debt.
• 20 billion to recapitalize Greek banks.
• 20 billion to buy back Geek Bonds, which will result in a 12,6 billion decline in the Greek Debt.
• 35 billion for collateral (AAA-loans from EFSF) for extending the bonds by the private sector (private sector bail out). 
• The assumption is that Greece will raise 28 billion by privatization. If it will not the 109 billion public bailout will have to rise.

Greek Debt Maturing In The Next 2 Years

This graph from Zero Hedge gives the amount of Greek debt that the government will have to pay back per month in the next 2 years.

Zero Hedge