Wednesday, 13 July 2011

European sovereign debt crisis

From "" the following excerpt:

The European sovereign debt crisis is spreading

In an effort to stop the European sovereign debt crisis from spreading, of the five peripheral European countries (PIIGS) – Portugal and Ireland have already received a bailout and Greece in the midst of receiving a second. However, these bailouts might not have been enough for the markets as things have taken a turn for the worst for Spain and Italy.

The yield, or interest rate, on Italian and Spanish government bonds shot up Monday. The rate on Italian 10-year bonds jumped to 5.7 percent from 5.3 percent at the beginning of trading, following sharp rises on Thursday and Friday. Yields on Spanish 10-year bonds meanwhile rose to 6 percent from 5.7 percent

As a result, equity markets around the world plunged. Germany’s Dax fell 2.33%, France’s CAC 40 – 2.71%, the Stoxx Europe 600 lost 1.4%, the Dow Jones Industrial Average was down 1.2%, or 151 points, and the S&P 500 dropped 1.81%, or 24 points.

In response, the Eurozone finance ministers had an emergency meeting yesterday at which they said they are ready to make their existing bailout fund more flexible in an effort to better support struggling governments and stop the currency union's debt crisis from spreading to larger economies like Italy and Spain.

To understand the severity of this problem, if it gets out of control, I put together a list of facts and figures about these two massive economies –

Italy is the world’s eighth largest economy and Spain is twelfth. 
Italy is the Eurozone's third largest economy and Spain is the fourth.
Italy's economy is six times larger than Greece's and Spain’s is 4 times.
Italy's debt-to-GDP ratio is more than 118% and Spain is 60%
Italy's debt is so large that it is about 25% of Europe's total GDP.

The big fear is that while Europe's euro750 billion-bailout fund can support Portugal, Ireland, and Greece, which makes up only 6 percent of the eurozone economy, Spain and Italy are too big to be bailed out. Without the possibility of a major bailout, these two economic powerhouses could default and the effects would be felt all over the world.