The Sovereign Debt of Euro Area Countries

The Economist carries an extensive article on this subject – you can read it here.

39 replies on “The Sovereign Debt of Euro Area Countries”

@Philip Lane
I can’t help feeling that the constant media frenzy about the international bond markets is scaring Irish consumers witless. The country has plenty of cash for the country’s needs – a mountain in fact. We should be celebrating this fact, publicising it everywhere and making sure we don’t napalm more on our banks (€11 Bn is surely enough). Our government’s continued slagging off of Greece only serves to assist the speculators’ attacks. Greece can point out that Ireland is far from being Europe’s shining light. They have already done it subtly and they may not soon forgive or forget our dishonourable behaviour:

“Greek prime minister George Papandreou…
“Today we are talking about Greece, but tomorrow it could happen to someone else.”
“You have a different scenario in Ireland,” he told reporters. “Ireland had a very big expansion into the banking system and that has created certain problems.”

(See The Irish Times.)

You would also have to wonder if our self-promotion effort has gone too far, judging by this part of The Economist article.

“The Irish economy is more flexible so its medium-term prospects seem brighter. The economy grew slightly in the third quarter of last year. There are even signs that tax revenues are recovering.”

@ Oliver

What will happen if people start to loose their nerve and view the governments exposure of tax payers to bank liabilities of 485bn as being simply reckless? Supposing they decide there is a safer home for their 300bn plus deposits? Something I am sure many Greeks are also considering at this moment. It would be most unpatriotic, no doubt, but then again people will do a lot to preserve their wealth.

Considering, the way our government has behaved since the beginning of this crisis we deserve the truth to come out, in spite of, rather than because of our government or the ECB. The fact that Anglo is even considering giving a 1bn zero interest rate loan to property speculators so as to avoid writing down debt is another shining example of our craven mentality.

Obviously, we will not get a proper bank inquiry. In any event, we know what happened, we just need the who not the why. However, shortly, we may get a proper and searing examination of our fiscal policies by the market. The governments obsession with caving in to insolvent banks has damaged the economy, to the point, that it amount to a slow dismantling of that part of the economy, which resides outside the pale of the public and semi-state sectors. Why this? Three reasons. Firstly, to preserve the pretence that the government were not as reckless as they were. Secondly, to try and hide the fact that the banks were not as reckless as they were. Thirdly, to try and disguise the fact that people were encouraged to pay ridiculous sums of money for properties that were worth only a fraction of what was paid for them. Government got 40% in taxes from property. Many of these loans were collateralised and held off-balance-sheet (OBSF) to disguise what was really going on. Hence, shareholders not knowing what hit them.

The PR spin machine of the government has been in overdrive fooling even Mr. Roubini as evidenced by his recent FT article. This spinning will soon flounder, viewed as it will be, against the reality of steeply rising unemployment, falling revenue streams, increasing indebtedness and a chronically weak economy which the government is determined to weaken even further with higher taxes.

Personally, I hope the sovereign debt of the Piigs is analysed and dissected. Is there some reason why it should not be?

Back in the autumn of 2008, after the collapse of Lehman Brothers, the ECB loosened the rules which govern how banks can get central bank funds. In particular, it let banks use government bonds rated BBB or above in ECB money market operations, instead of merely accepting bonds rated A-, or more

So, when the ECB wants to “forget” that there was a crisis (and when the crisis is ongoing) what happens next?

“One remedy would be for Greece to arrange a bridging loan from another euro-zone country in good credit, such as Germany.”

As distinct from a non-euro-zone country in “good credit” like the USA?

Of course the USA is in good credit with China. Let’s hope that China is willing to provide the USA with credit of say $2,5000,000,000,0000 this year.

Happy days.

“This spinning will soon flounder, viewed as it will be, against the reality of steeply rising unemployment, falling revenue streams, increasing indebtedness and a chronically weak economy which the government is determined to weaken even further with higher taxes.”

“..which the government is determined to weaken even further..”


That is impossible.

Our leader just said ………

“Yes, we can say in 2016 when we get to O’Connell Street and look up at those men and women of idealism that gave us the chance to be the country we are that: ‘Yes, we did not fail our children but we did not fail our country either’,”

Do you dispute the magnificence of our Dear Leader?

Can you not see his wisdom?

Do you not see and understand that you only have to wait until 2016 and all 100 years will be revieled to you?

Our Dear Leader knows that ignorant Greeks do not know what our Dear Leader knows.

Our Dear Leader knows that 2016 has MAGIC.

“Once it was safely inside the euro, indeed, Greece relaxed its fiscal grip.”

Why is the word “indeed” necessary in this sentence?

Why does it not read ….

“Once it was safely inside the euro Greece relaxed its fiscal grip.”

Who writes this stuff?

It’s pretty incredible to me that not one commentator so far has drawn a single positive thing from this article (from an Irish perspective).

This relentless monomaniacal negativity is a little tiresome lads…

I note the role played by corruption, specifically tax evasion, which is clearly rampant in Greece. Naturally, that does not happen here. Unless organized by the state ….. !

More seriously, evasion is increasing and mirrors perceived corruption in high places.

As watched pot syndrome will apply, I suspect the USA will begin to falter more noticeably soon, but will still cause surprize! But taxpayers do not really matter, small people you see. Governments look after those who look after them.

“t’s pretty incredible to me that not one commentator so far has drawn a single positive thing from this article (from an Irish perspective).”
What would your positive take be then? Its only a flesh wound?

How about ‘Thank Christ our previously utterly incompetent Government passed a difficult Budget which has resulted in bond markets differentiating us from fellow PIIGS and without which we would be at the very frontline of the sovereign debt market bloodletting.’

So, it is only a flesh wound….
Could it also be that there are easier pickings, now, in terms of liquidity, access and profitability to deal with greek bonds than piddly little irish stuff. Are we perhaps too small to bother with? Eoin – whats the bond markets view?


May the single positive spin from the article is that if you put your house in order, or at least try, the bond vigilantes will reward you with a with a better rating and thus fund the sovereign at a lower rate. When combined with a credible recapitalisation and clean up of the banks balance sheets, the private sector cost of capital might then fall and the spigot get turned on. Just a random thought.

However, anything “positive” is now deemed non credible to the panapoly of doom mongers, fantacists, nuts, extremists and conspiracy theorists that occassionaly wander into this chet room to communicate their thoughts with the intelligent and the otherwise sane.

I am off to the relative sanity of now

@ Brian

we live in a relative world. Relative to Greece and Portugal, the markets are deleriously happy with the situation in Ireland.

And, as i previously suggested to you, in all the charts and analysis of Euro-zone soveriengs going round at the moment, I’ve yet to see anyone add the NAMA debt onto our general issuance this year.

@ CoC

I’ve previously highlighted the growing seperation between the PGS and the II in the PIIGS. Ireland and Italy, while clearly still with much work to do, are considered to be on a stable track to consolidation and recovery, while the same can definitely not be said of Greece, and to a lesser extent Spain and Portugal.

Also, a memo sent round Barclays yesterday…

“Please alert your teams not to use the acronym PIIGS in any written communication. Rather, they should spell out the acronym and say: Portugal, Italy, Ireland, Greece and Spain. Research Production globally have been informed to take out any reference to the acronym in question.

Thank you,


Obviously the Club Med has been getting a bit touchy about the PIIGS tag…

Yeah, I do agree that relative to Greece we are good. Why are people ignoring NAMA? Its not like its not real money – lets see.
Well, we are 18 months into the banking crisis and as yet we still have not seen any cleanup of the balance sheets. So, forgive my pessimism.
@Concubhar O’Caolai
sorry about that old cock….:)

@ Brian

re NAMA: its off market, its being swapped for (albeit dubiously valued) assets, and its ultimate affect won’t be known for 5-10 yrs. As such, people are largely ignoring it.

re bonds: the current volatility is actually seeing some banks/funds stop holding Greek debt altogether as their VAR models can’t handle the current volatility on such allegedly ‘safe’ assets (ie not a trading decision, risk is saying “No”). This obviously creates a further negative push on the price and the liquidity. I expect there’s something similar happening with Portugal right now. In contrast, look at Irish bond and CDs prices in recent months – terribly boring to be honest. As such, for that reason alone its a lot better buy in many peoples eyes. And so again, as Joe Lawlor touched on there, this becomes a virtuous and self-healing cycle.

While we can pat ourselves on the back that we’ve managed to distance ourselves from Greece, Portugal and Spain in the international markets eyes the knock on effect for the Euro zone as a whole (which will affect us) isn’t going to help recovery if Greece can’t get its house in order.

@Brian Lucey, If schadenfreude is the only way we can feel better about our situation, then things really must be bad..

As Eoin says, we live in a relative world. We are relatively better than the other PIIGS, but (thanks to that unfortunate acronym) we are still in the same basket as them. The sovereign bond market is expected to absorb huge issuances this year, and the further we can distance ourselves from the other peripheral EU states the better.

@joe lawlor, There may be the occasional doom monger here, but the site does provide a good counter point to the wholly panglossian outlook from other quarters. As the article says, this is a marathon, not a sprint. Thinking that we have done enough at this early stage because we are putting some daylight between ourselves and the truly profligate would be a mistake.

The true irony here is that because things got so so so bad here in late 2008, our fiscal situation collapsing so sharply, we were forced to get our house in order when there was a for larger sense of calm in the sovereign debt markets. We’re 15 months or so into the consolidation process, and its only in recent months that we have been “rewarded” by the bond markets. I shudder to think what would happen if we were only getting going now like the rest of the PIGS are.

Also, i think all those who have been a bit snarky at the NTMA in recent weeks should be seriously grateful to them for having pre-funded our 2010 requirements by 5bn last year, and for having done 35% of this years issuance by the middle of January. Credit where it is due.

“re NAMA: its off market, its being swapped for (albeit dubiously valued) assets, and its ultimate affect won’t be known for 5-10 yrs. As such, people are largely ignoring it.”

Yup in the same way that they ignored subprime and all the SIVs of the big US banks like Citi and all the accounting shenanigans at Anglo. It is all a matter of confidence. Everything is going swimmingly when one day out of the blue there is a crisis of confidence and bam! We have default.

PS: Shamelessly lifted from Reinhardt and Rogoff. Great book. Advise all Pollyannas to spend some time reading it.

And then God only knows how many other dodgy off-balance sheet loans will remain even after NAMA. How many Green Property type vendor-financing arrangements, all conditional on a rise in asset values?

The eurozone should set-up an “emergency last resort” fund. If the US and UK engage in further quantitative easing, the ECB should follow suit and use it as a source of funds for the facility. I haven’t thought this through, so it mightn’t be possible but at least it would get around the thorny issue of one country bailing another out and also weaken the euro exchange rates.

Ireland is by no means out of the woods, but any respite is welcome. One of the key metrics for rating sovereigns is Interest Payments to General Government Revenues. This would currently suggest a downgrade from Moodys is overdue. It’s possible that Bank bailout costs (/NAMA) will trigger this.

Of the PIIGs, Italy does deserve more attention.

Re: Bondholder/ Bond Market behaviour

There has been a lot of speulation on this blog over a lengthy period as to how bondholders and bond markets might behave in hypothetical situations. The reason for the speculation is that their behaviour is critical to our national and continental economic prospects.

One would expect there to have been empirical studies on bond market behaviour and dynamics. Can anyone enlighten us on these points? We have a lot of economists in our universities focussing on financial markets so I am hopeful that the expertise is out there.

My own instinct is that bondholders, like any lender, must be naturally capricious in dealing with issuers of bonds in order to encourage repayment. Therefore, the first debtor to test the bondholders’ willingness to tolerate partial default in a crisis is likely to get burnt. I also surmise that individual bondholders, and their agents, like a burnt creditor will tend to avoid any entity that has defaulted for the rest of their natural lives.

In relation to bond market dynamics, I would be interested to know how the following assumptions stack up:

1. In order to maintain a strong position borrowers (bond issuers) need to maintain the confidence of the majority of the market t=for their class of bond. However, if they lose the confidence of a few key participants in their section of the market then this can have a knock on effect and relegate them from that section altogether. Therefore, one requires a “filibuster” majority for confidence and, speaking of market participants mathematically (rather than analogising with human relationships), confidence can only be gained slowly but can be lost rapidly.

2. When yields on one’s bonds increases, or perhaps if one’s credit rating is downgraded, then one is “relegated” to a different section of the market, i.e. bonholders who are willing to take on more risk. This section of the market is inherently more jumpy and volatile.

3. Bondholders are as concerned about the dynamics and sentiment of the bond market (i.e., what capacity the bond issuer will have to roll over debt and how the bonds they buy will be valued after purchase) as they are about the fundamental financial strength of the bond issuers. This has the effect that the bond markets exhibit an endogenous amplifying effect in relation to any perceived weakness of an individual bond.

4. Bond markets have long memories.

Apologies for the tangential nature of this comment..

It hasn’t been mentioned on this website that I have noticed anyway but isn’t the EU and ECB having serious concerns about NAMA at the moment?? If it gets shot down (which I would like to see happen) then we could be in for a rough ride on the bond markets until we come up with an alternative……and the one saving grace with NAMA putting the debt off the of the gov’s balance sheet might not apply!

With Irish 10-Year Yields still north of Spain, Portugal and Italy, it seems Bond markets are a little less convinced of our ‘progress’ than the tone of much recent commentary would suggest.

Talk that we’ve managed to distance ourselves from Spain, Portugal, Italy and Greece seems at best premature, and runs the risk of providing armoury for the still in denial ‘work to rulers’ as they set aggressively about the task of un-picking the December budget – oh the joys of Spring!

@John Looby

spot on. We have travelled some steps on the journey. Our spreads have narrowed in Sovereign land and the banks are even managing to sell some of their paper. Let us be realistic it is progress of a sort. It is over hyped on RTE and underhyped in here. However to borrow a football analogy we are closer to Leeds & can only aspire to the status of a Portsmouth. Plenty to go yet.

@zhou: Like I said, read “This Time Its Different” by Reinhardt and Rogoff. An empirical study of 800 years in sovereign bond markets. And eminently readable.

Garo – I am reading it. I have not come across a part yet that deals with the points/assumptions I raised above.

@Greg – “Who writes this stuff?”.

The same people who say ‘absolutely’ when agreeing with the anchor on a blindingly obvious statement he/she has just made to them (usually a statement they try to make sound like a question) while they are reporting from a location. For example:

Anchor: So bond spreads widen when governments keep borrowing like there’s no tomorrow and, being a bunch of ex-teachers and people who have never had real jobs, demonstrate they have no idea about how to run an economy Darius.

Reporter: Absolutely, Damien. Indeed they do. And your ego is starting to look like it won’t fit through the door as you try to leave the studio tonight.

Anchor: We’re sorry, the line to Darius seems to have gone down.

Of course, outstanding journalists like myself have no need to resort to that.


It’s Friday and I’m off to the pub.


My guess is that when the pundits, the bond markets, the butchers, etc. have dealt with Greece they will then turn their attention to Spain and Portugal for a few weeks and they too will go through difficult times in the limelight. Then they will be back at Ireland and Italy. It’s not that we are better, it’s just that we aren’t quite as bad. We are not out of any woods, just standing at a junction on a path, wondering whether we should go down the route where we can hear the bear roaring or the other one, where we know that guy from the Blair Witch Project lives. It might be dark but we can hear Greece getting goosed somewhere out there so let’s proceed on tiptoe. Hush now.

Our banks got into trouble in 2007. This fact has been concealed by our establishment ever since. The bank guarantee was sold as a cost free way of keeping what we were told were our totally stable banks free from any -strictly foreign – contagion. The markets, it was implied, might panic and misread the fundamental, unquestionable, uncontestable soundness of our banks.

The guarantee we were told for many months afterwards was a tremendous triumph.

We were still being told it as our banks utterly collapsed. This was followed by the huge deceptions of the NAMA debate. During this debate we were told repeatedly – including many times on this site – that sadly we were stuck with the bank’s losses because of this legislative guarantee. Removing it would utterly destroy the country. This terrorising came from the same people who now – without irony – condemn other people’s negativity.

3 years after the banks began to totter, more than a year after they completely collapsed, we are offered a pathetically limited secret inquiry, due to report in another year. So sometime four years after the banks began to totter we may read some of the truth. The guarantee that we are told means we must pay out tens of billions is excluded from the inquiry, as is the period when the banks collapsed, NAMA, and the many questionable activities ever since.

Not to mention that we have a huge chest of cash but we were constantly threatened with a brutal assault by the IMF right up to the budget. Then suddenly the recovery had started and a spending splurge was on the way.

Now how on earth could anyone be negative or cynical?

No apologies necessary. Very pertinent comments!

A question for you. What would happen if all these bondholders decided to sell to bankrupt institutions and to invest in real assets? We assume that only corporations hold bonds and that these are public and eternal. Suppose the real wealth of a very few very rich individuals and dynasties was in jeopardy and they decided to withdraw? Eventually, there is no longer any money creating machine! Eventually, governments would print more money, but the essential control of a market is gone.

All we have then is governments competing to devalue…… chaos. Deflation one minute while inflation rages out of control in others. Husks where bond holding companies once stood, destroyed by weapons of mass financial destruction. Derivatives. It all happens soon.

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