1. Convince European officials to provide another bailout to the tune of 130 billion euros? Check.
2. Persuade your creditors to â€œvoluntarilyâ€ accept 100 billion euros less in repayment? Check.
3. Close the Eurozone debt file as â€œsolvedâ€? Not a chance.
Despite the unprecedented amount of financial support Greece has received over the past two years or so, does anyone seriously believe Europeâ€™s debt problems are over? At best, Greece has avoided a near-term default, but this in no way nudges Greece any closer to sustainability. For proof, one need only look to last weekâ€™s bond yield for proof.
True, the bond auction was held prior to the official announcement confirming the second bailout package, but the market knew the deal was ready for final approval. It is also true that even with the guarantee of more bailout money and the bond swap deal in place, yields on Greek debt remains considerably higher than other Eurozone member nations.
In last weekâ€™s offering, the yield for new 11-year Greek bonds averaged around 19 percent, while 30-year bonds were in the 14 percent range. By way of comparison, the benchmark German 10-year yield is currently only about 3.6 percent.
To be blunt, these yields are simply not sustainable and there is no way Greece can afford to borrow money at the current rates. With its ability to borrow curtailed, Greece will have to rely on further spending cuts and massive tax hikes to meet its budgetary needs. Few believe this will happen.
Just look at the ferocity of the protests against the initial austerity efforts which are little more than a drop in the bucket when you consider the enormity of the present deficit gap. In order to avoid insolvency, Greece will continue to rely on assistance from the rest of the Eurozone for the foreseeable future.
It would be bad enough for the euro were it just Greece facing this predicament, but there are several other countries sharing the same fate. Itâ€™s just that Greece is the furthest along this inevitable path so it receives most of the news coverage.
Hungary Warned About its Debt
On Tuesday, Eurozone officials emerged from a hastily-arranged meeting to announce that Hungary must reduce its debt level to 3 percent of GDP by the end of this year. Failure to do so will result in the suspension of EU funds earmarked for development projects for the country.
Interestingly, Spain, facing its own fiscal challenges, received permission to run a deficit equal of 5.3 percent of GDP rather than the original target of 4.4 percent. Naturally, this is not going over well with Hungaryâ€™s government and even the Austrian finance minister is questioning why one Eurozone member is being held to a more challenging standard than other members.
Still, it is Portugal that remains the odds-on favorite to be the next sovereign nation to be forced to appeal to its neighbors for help. Following two rounds of Long-Term Refinancing Operations (LRTOs) to recapitalize the European banking system, bond yields did decline for many Eurozone nations. But even with its two-year rate declining to 12.48 percent, Portugalâ€™s current yields are more than double this time one year ago with no relief in sight.
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