By Hao Li: Subscribe to Hao's RSS feed
October 25, 2011 4:24 PM EDT
The euro crisis has blown up in 2011.
The borrowing rates of several peripheral Eurozone countries have surged from 2010 levels and have become simply unsustainable.
At the end of 2010, the yields of the Greek 10-year debt were about 12 percent. Now, they have doubled to 24 percent. Portuguese 10-year yields surged from six percent to 12 percent.
Portuguese 10-year yields, from Bloomberg
These levels are clearly unsustainable, meaning governments cannot afford them.
Governments get money to run their operations from two primary sources: taxation and borrowing.
Under the rates of Greece or even Portugal, however, the interest payments alone would consume most or all of the tax revenues. It would also preclude these countries from borrowing for a while because their debt load would rapidly soar.
Greece’s debt to GDP ratio was 140 percent at the end of 2010. Assuming the average interest rate of its debt is close to 24 percent, interest payments alone would account for 33 percent of GDP. Greece tax revenues at the end of 2009, however, was only 20 percent of GDP.
In other words, this back-of-the-envelope calculation shows that Greece’s interest payments alone would exceed all of its tax revenues.
Using the same back-of-the-envelope calculation for Portugal, interest payments would account for 11 percent of GDP while tax receipts are only 19 percent of GDP.
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Weekly Roundup: Asian Markets Fall On Weak China Data And Euro Zone Debt Concerns
