Recent news about Greece’s and Spain’s refinancing problems and the idea going around of interest rate capping on the EURO-Zone Countries’ sovereign debt made me react, as it hopefully points out that what the solution could be is starting to emerge…. Though please note that it does not mean it is implementable!
Greece reimbursing some debt to the ECB thanks to three months borrowing was presented as great news. Ok, but that was for what is relative “petty cash” of EUR 3.2 billion. And at a three months yield of 4.43%… hmmm, ok so any real problem solved? No! They are waiting for international creditors to come up with… EUR 31.5 billion in the next months!
Spain has borrowed on a ten year horizon at a yield of just above 6% in June (again petty cash, was for EUR 2 billion). Ok, that would put their total yearly cost of their whole debt at 10% of GDP. How sustainable would that be? Especially as in today’s world, that money would not “go back into the economy” as some still naively think….
So here is my point: the only way to make debt sustainable is a rock-bottom interest rate, of say <0.5% p.a., however it would imply finding creditors… The ECB itself? Likely, but a strict fiscal discipline and sanctions would have to be possible, and the time-line to see that implemented AND work in the EURO-Zone (and EU) is, well, not very short…. However, who knows with the raising urgency of it all? So yes, interest rate capping as such is an idea, but how is the headache!
So, let’s say the debt is bearable, but then budget balance is a must, not to say a budget surplus! In two words: good luck!
Voila, nothing solved, but talking is going in the right direction…..