Greece's debt crisis has been making the headlines for the past few months, but while editorialized insights dominate the public, what do the hard numbers look like? After all, with fears that the debt contagion will spread to a handful of other European nations, it's only natural to wonder how close they compare financially to Greece. Today, we'll explore just that with a deeper look at the debt numbers. (For a background on the situation in Greece, see EU Economics? It's All Greek To Me.)
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Back to the Beginning
When it comes to Greece's debt numbers, a couple of the most telling metrics can be found at the start of it all. The Stability and Growth Pact, ratified in 1997, provides rules for EU member states' budgetary requirements. With a shared currency in the euro, the pact was devised as a way to ensure that less affluent countries couldn't harm larger economic powers like France and Germany, who suddenly found their financial fates intertwined with smaller eurozone states like Greece and Austria.
The pact was designed to prevent smaller nations from unhealthy deficit spending and borrowing. But the problem with the Stability and Growth Pact was with enforcement; nearly half of all EU member states have been in breach of the pact at some point.
With those warning signs, why is it that the Greek debt crisis has taken such a dramatic toll on stocks? A big part of it was financial wrangling on Greece's part to conceal the extent of its budget deficit, a move designed to protect the country from the bear market of 2008. So, what do the numbers look like right now? Historically, Greek government spending accounted for around 50% of GDP - versus around 35% even for debt-laden countries like the U.S. - a factor that has contributed to a budget deficit that rings in at 13.6% of GDP (the second highest in Europe).
When it comes to short-term volatility in the markets, the key word is debt. Right now, Greece has around $400 billion in public debt, 1.25 times more debt than the country's entire GDP. That's a stifling amount of borrowed cash to service, but what's more significant is when the debt is due. Around $74 billion worth of that debt (54 billion euros), a staggering chunk of the country's total bill, comes due in 2010. Essentially, if Greece can't come up with the cash to pay off its dole, either through additional borrowings or surplus funds, the country falls into default, a seriously bad situation for the euro.
Fortunately for the world's markets, that scenario was avoided over the weekend thanks to the activation of loans from the IMF that should carry Greece for the next three years, as well as a 500 billion euro bailout package for all member states approved by European finance ministers.
Comparing the Other Eurozone Credit Statements
But Greece is far from alone in its delicate financial predicament. Portugal, Italy, Ireland and Spain also stand out as states that could potentially see financial difficulties because of their high debt loads and large deficits. During the last week of April, when Standard & Poors downgraded Greece's long-term sovereign debt to junk status, it also knocked Portugal's bonds in a downgrade. That move had serious repercussions for the market - it was one of the first instances this year where another eurozone nation started showing cracks in its façade.
Fears Assuaged, For Now
Investors are still reticent to bet on American stocks that are heavily involved in the eurozone for fear that an additional slide in the currency will be seriously bad for companies that report their finances in dollars. But that said, the latest bailout packages provide a sort of safety net for any new EU states that start to show signs of financial trouble.
Knowing the reality of the numbers is giving confidence back to the market as a whole this week. We'll know soon whether that's a trend that should continue in 2010. (To learn more, see Greece: The Worst-Case Scenario.)
Feeling uninformed? Check out the financial news highlights in Water Cooler Finance: Greece Is Burning And Buffett's Under Fire.