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. 

Greek 10-year yields, from Bloomberg

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.

Contrastingly, the U.S. interest expense on outstanding debt was $413 billion in 2010, which was only 2.8 percent of GDP compared to tax revenues of nine percent of GDP.

Michael Woolfolk, senior currency strategist at Bank of New York Mellon, said while each country has a different tolerance level for borrowing costs, a 10-year rate above six percent could potentially be damaging to the economy.

Greece and Portugal are way past six percent. Spanish and Italy yields have climbed close to six percent. 


Italian 10-year yields, from Bloomberg 





Spanish 10-year yields, from Bloomberg 


Contrastingly, the German and U.S. 10-year yields are just a tad above two percent.

Woolfolk, like many other analysts, think Greece is beyond salvation and will default.

The key question for the euro crisis, however, is whether or not yields will rise to unsustainable levels for Italy and Spain, the third and fourth largest economies of the Eurozone, respectively.

Woolfolk’s central thesis is that Greece will default but the other peripheral countries – Italy, Portugal, Ireland, Spain – will not. 

He thinks the actions of Eurozone policy makers will eventually ring fence Greece and save the other peripheral countries. 

However, there is always the possibility that the “animal spirits” of investors will reject the government’s bailout measures and take the world to the break of another financial crisis, he said.


E-mail Hao Li at

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