These little PIIGS eurozone countries issued a lot of short-term debt:
The chart is from the latest issue of the National Institute Economic Review, in which NIESR’s Nathan Foley-Fisher notes that:
A moderate increase in rolled over debt is not a problem in normal times, but when the magnitudes of maturing debt are particularly large levels of net borrowing are high, and creditors are scrutinising the actions of the government, and one another, a different story may emerge.
That has been the case presumably for Greece, where market skepticism about whether the country could fulfill its 2010 refinancing requirements reached critical mass in recent weeks.
It’s really a credibility problem; Greece has to convince the markets and fellow members of the European Monetary Union that the country can cut its budget and refinance its existing debt at reasonable rates.
But the credibility problem does not end with Greece.
As Andrew Clavell, of the Financial Crookery blog, wrote over the weekend:
If Greece is saved, the other porcine overspenders will fall in the market’s crosshairs, and of these only Ireland has started to take meaningful austerity measures. However, in for one, in for all, will be the likely EU central response. It is inconceivable that Greece would be saved and Ireland thrown to the wolves.
Lucky for the UK then, that its debt issued in 2009 has a longer maturity profile than some other European sovereigns. (Note, however, that the chart is just for 2009-issued debt. On the basis of existing debt, the UK’s funding profile looks very different).
And according to NIESR’s Foley-Fisher:
The figure emphasises the relative strength of the UK position. The countries are all forecast to require gross debt issuance in the range of 15–20 per cent of GDP in 2010, with Spain and Greece in the worst positions. Since it can issue a larger share of long-run debt, the UK requirement for gross issuance declines as a percentage of GDP. By strong contrast, should Spain continue to rely on short-term markets to fund deficits and maturing debt, it should also expect to face increasing debt issuance, up to almost 30 per cent of GDP by 2013. Ireland and Greece will face only slight increases over the amount they are expected to issue in 2010 because their use of longer-term credit markets permits them to delay repayment of at least some portion of their debt until later years.
In conclusion, the United Kingdom’s robust reputation in credit markets allows it to issue debt at longer maturities and gives it a strong advantage in comparison to other countries in the Euro Area. Of course, this calculation depends heavily on the ability of governments to continue accessing credit markets as they did in the past. If Spain decides instead to issue a greater proportion of long-term debt, its outlook will improve; and if creditors’ sentiment about Greece is sufficiently pessimistic that they are de-facto excluded from longterm credit markets, then its position can be expected to worsen.
Anyway, the question of Greece contagion — to Portugal, Spain, Italy, Ireland and potentially on to the UK — is gaining pace. And while the UK may be in a better position than other European countries, budget- and market-wise (for now) there is one thing that it lacks: systemic support.
As Clavell points out:
Greece is to Bear Stearns what Iceland is to the subprime hedge funds which collapsed in 2007. That is to say, Iceland failed (evidenced by its currency and banks), and sequentially Greece is teetering on the brink but looking increasingly likely to be rescued by a reluctant neighbour.
. . .
The next domino in the banking world was Lehman Brothers, six months after Bear Stearns. It was a proper failure, to put it mildly. If the above reasoning is correct, Lehman’s sovereign mapping may be the UK rather than one of the PIIGS. Who is coming to the UK’s rescue? Pimco, Soros, Rogers and others are on record with colourful language about the UK gilt market though one must naturally dilute their rhetoric by their book positioning.
From one crisis to the next then.
Related links:
Nouriel Roubini and Arnab Das: Europe’s sinking south – FT
Just who are these dark forces attacking Greece? – The Economist
The sovereign ‘Northern Rock’ funding model – FT Alphaville
The sovereign debt premium – FT Alphaville