Something is rotten in the state of Europe

IT ALMOST seems that we have got to the point where billion-euro bailouts are relegated to the same news level as dogs waterskiing and images of Nick Clegg found on a piece of toast. But with the Greek debt at €110bn, Irish at €85bn and Portuguese at €78bn, these are not trivial sums. As the late Senator Everett Dirksen famously said, “a billion here, a billion there and pretty soon you’re talking about real money.”

Are any of these countries good for their debts? Michael Hewson, market analyst for CMC markets doesn’t think so: “Even if you cut the interest payments to zero, Greece still wouldn’t be able to pay. The biggest fallout from this is political. German tax payers will be asking their government, and rightly so, ‘why should we be working until 67 when Greeks are retiring to sip Ouzo at 58?’” On Monday, Standard and Poor’s reduced its rating on Greek debt from BB to B. According to Hewson, “the sovereign debt crisis is going to pop. It’s just a question of when it happens and the fallout is going to be huge.”

On Friday, what started as a storm in a tea cup resulted in euro-dollar taking a battering. German newspaper Der Spiegel claimed that Greece was on the cusp of exiting the Eurozone. The rumours prompted vehement denials from EU finance ministers, but many traders ventured that the federalist ladies and gentlemen protested too much.

Although markets calmed a little as the imminent fears of Greek withdrawal from the Eurozone subsided, the fears posed the question of what the market reaction would be if Greece, or one of the other struggling European periphery debtor nations, such as Portugal or Ireland, left the Eurozone.

Although it hasn’t happened in political terms, a break up of the Eurozone has already happened in the sovereign debt markets, with the weak getting weaker and the strong getting stronger. When Greece and Ireland were being hit with 15.73 per cent and 10.67 per cent yields on ten-year bonds respectively, Austria’s yields hovered around 3.52 per cent.

According to Angus Campbell, head of sales for London Capital Group, though there was an argument against the bailouts of the weaker Eurozone nations, they have now happened and need to be dealt with. “The bottom line for now is that the countries that have been bailed out really have to get their houses in order. This means paying for the years of profligacy by reining in their government spending and bringing in more in tax.” Says Campbell: “That means years of pain and many will blame the bankers or financial crisis, but the profligate chickens have really come home to roost now so it’s time to pay the price.”

And should the news break that a country was to break away from the Euro, Michael Hewson sums up his advice in two words: “buy gold”.