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A little more on what I call the "unsustainability level" of sovereign yield spreads.
Of course, there is not a "scientifically" defined such level. This level is a function of the public and private debt as a percentage of GDP, the rollover needs and the time-span.
In a monetary union where you cannot devaluate your debt, if you have to pay 200 basis points (2.00%) more on interest compared to your partners for a mid-term period (let's say five years), you are finished. The reason that I include the private debt is because the spread on sovereign passes to the private sector very soon. So, Troika is supposed to enforce Greece measures that will reinstall its competitiveness. Oh, really? With a public and private debt at around 260% of GDP (Greek private debt is relatively low at an average of 110% compared to other old-EU countries), and a spread of 200 basis points, you have to pay a surcharge around 5% of your GDP compared to Germany. That's not working. Full-stop. You might be able to do that for one year or so but not for five (in the first year you have to roll over only part of your debt). But you do not need the full five years to have a crisis. You just need investors to realize that the spreads are here to remain for five years. Then it is self feeding. Spain is in the situation that they are not yet sure for how long the spreads will remain above 200 bps. When they make up their mind, they will either jump sky-high or fall bellow 100 bps.

"Eurozone leaders have turned a 50bn Greek solvency problem into a 1,000bn existential crisis for the European Union." David Miliband
by Kostis Papadimitriou on Tue Jun 7th, 2011 at 03:19:50 AM EST
With a public and private debt at around 260% of GDP (Greek private debt is relatively low at an average of 110% compared to other old-EU countries), and a spread of 200 basis points, you have to pay a surcharge around 5% of your GDP compared to Germany.
I am reminded of this table from 2009 - it may have been Jerome to post it in an open thread. Anyway, here it goes:

Think about those numbers and the facts that 1) debt is used to prop up growth rates; 2) when the private sector retrenches, the public sector funds the shortfall with its deficit. Clearly no sensible monetary union can be built on constraining public debt but not private debt as long as the private sector enjoys an implicit guarantee from the public sector.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Jun 7th, 2011 at 03:56:45 AM EST
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These data by McKinsey on Economist I had on mind when I've claimed "relatively low" about Greek total debt (Gremany 286%, UK 466%, France 322%, Italy 315%, year 2009). These include debt of financial institutions. But I have to check if the Greek data are comparable with Jerome's or Economist's (McKinsey) data and I will come back.

"Eurozone leaders have turned a 50bn Greek solvency problem into a 1,000bn existential crisis for the European Union." David Miliband
by Kostis Papadimitriou on Tue Jun 7th, 2011 at 11:42:02 AM EST
[ Parent ]

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