The alarming rise in Public Debt in the Eurozone (Euro Area) continues to rattle markets and investors, according to QNB Capital analysis.
Public debt to GDP in the Eurozone reached 86.0% at year-end 2010, from a level of 70.5% in 2005. Leading the list in the Euro Area is Greece with its public debt to GDP reaching 142.8% in 2010. On May 20, 2011 rating agency Fitch downgraded Greece’s sovereign long-term ratings by three notches to B+ from BB+, stating that it reflected the scale of the challenge facing the government in implementing a radical fiscal and structural reform programme. The other countries in the Eurozone with a high public debt to GDP as at year-end 2010 include Italy at 119.1%, Belgium with 102.5%, Ireland with 96.3%, and Portugal with 93.0%. A global comparison with some major economies shows Japan with a high of 197.5% and US at 62.3%. China and Qatar are comparatively low with 16.3% and 11.0% respectively as at year-end 2010, with both having favourable fiscal positions.
The Eurozone sovereign debt crisis started and mostly centred around Greece in early 2010. The primary concern at that time was the rising cost of financing government debt. Rating agency Standard and Poor’s raised an alarm on April 27, 2010 when it downgraded Greece’s sovereign ratings by three notches to BB+, which is the first level of speculative, or junk, status. The cost of servicing Greece’s short-term debt had rocketed to 14% by then. On May 2, 2010, the Eurozone countries and the IMF agreed to a EUR110 bn bail-out package for Greece. This was followed on May 9, 2010 with the set up of the European Financial Stability Facility (EFSF), which was a special purpose vehicle created by the Eurozone countries with the aim of preserving financial stability in the region. As part of the overall bail-out package of EUR750 bn, the EFSF can issue bonds guaranteed by the Euro Area member states to the tune of EUR440 bn. The individual sovereign bail-out package was further extended to include Ireland in November 2010, with EUR85 bn, and Portugal in May 2011 with EUR78 bn. Despite receiving a bailout, Greece continues to remain at the centre of the Eurozone debt crisis. Worries have grown in Europe that Greece will be unable to meet a funding gap that is estimated at EUR60 bn over the next two years. The price of insuring Greek debt against default has risen from around 10% at the beginning of April 2011 to almost 15% on as on 24th May. Any restructuring of Greece’s debt, would be regarded as a default event, with the risk of seriously unsettling financial markets, and could lead to higher borrowing costs for European governments, according to QNB Capital analysis. With Greece unlikely to be able to meet its forthcoming debt repayments, it is likely that they will receive additional funds through a second bailout package, to ensure financial stability in the Eurozone.
In addition to the rising public debt, the increasing levels of government budget deficits are becoming a cause for concern. Greece’s government budget deficit to GDP has gone up from 5.3% in 2005 to 10.6% in 2010, according to data from the Economist Intelligence Unit (EIU). Ireland’s government budget has had the most dramatic turnover in a relatively short span of time, with the budget deficit to GDP reaching 32.2% in 2010, from a budget surplus of 1.7% in 2005. Portugal’s government budget deficit reached 9.2% in 2010, from 5.9% in 2005. Meanwhile, Qatar has been posting government surpluses for the last eleven fiscal years, which in total is estimated to have reached over QR212 bn (US$58.4 bn).