Budget Deficits And Sovereign Debts Of Europe Steer Up Fears Once Again

Budget Deficits And Sovereign Debts Of Europe Steer Up Fears Once Again

We have been taking for a while about Ireland nearing a bailout and about the fact that most international organizations and other European member states pressure this country into seeking financial help. Well, anxious glances are directed in the wake of concerns about the Irish public finances and their effects on European banks.

When the outbreak of the Greek crisis took place, earlier this year, all banks involved feared for their own financial situation. Is it now possible that we have a new such story at the very western edge of Europe?

The sovereign debt crisis of several EU countries has not been extinguished and will not suddenly disappear even if these countries have tried several measures and bailouts. In this context, the Irish officials said they have sufficient funds to last until next spring, and Portugal said it is better off than Ireland and does not need any help. However the current situation of the indebted countries seems similar to the one a few months ago, when we saw that what happened in Greece and how its costs to borrow to cover large debts, rose.

Countries, both the stronger ones and the weaker ones in the EU, are subject to turmoil again mainly, as some analysts say due to the use of the same currency, and their economies are pulled in different directions. Refinancing the debt of such indebted countries requires strong intervention from the EU authorities to solid purchase state bonds. Ireland, under these circumstances might require 80 billion euros, but that means 50% of the GDP of this country. We have if you like, two parallel financial markets.

Despite the claims  of Irish officials that their banks do not need extra help, investors continue to bet on a pessimistic scenario when it comes to Irish bonds and increase their yields for sovereign debt financing. The Irish mortgage market declined which has aggravated the critical bank debt in this country. We have an example from Portugal where yields rose to 6.7%, underlining the EU’s worries. So the possibility exists that such turmoil was not only Ireland but also include Portugal, Spain maybe.

Although Portugal has borrowed sufficient funds from international organizations, its budget deficit is still 9 percent of its gross domestic product, much higher than the 3% limit for euro zone countries. So fears grew over this country again, especially as there are some rumors that the government in Lisbon was not engaged enough with the implementation of austerity measures, as Ireland and Spain. The Portuguese Finance Minister Fernando Teixeira dos Santos said on Monday evening in Brussels that the situation in Ireland has created dangers for all euro area countries. He said he had prepared a robust budget by cutting salaries, the freeze of pensions and the implementation of new taxes.

So, what we know now is that in early 2010 the EU was a concerned and created a rescue fund of 500 billion euros (about 680 billion dollars) after the crisis in Greece to be able to support other similar countries. Here the countries with potential of needing the money are Ireland and Portugal. Spain is not far from the concerns of investors since its deficit reached 9 percent of GDP at a time, and just over 20% unemployment – factors that slow down the economic growth. And with rumors that state the EU is weak due to the single currency use, investors’ confidence seems to be more and more undermined.