Fear is spreading in Europe. How many countries are going to need bailouts -- and how many billions of euros will that take? And is the entire euro alliance at risk?
After Greece had to be rescued with a spectacular aid action earlier this year and then Ireland earlier this week, it is no longer a quest of if another country will require a bailout, but when. Most experts are in agreement that Portugal will be the next country to require assistance, despite denials from Lisbon.
But what scares those who deal with euro policy the most is the situation in Spain. The €750 billion program set up by the European Union and the International Monetary Fund for dealing with the euro crisis may be enough to cover Greece, Ireland and Portugal without problems, but there could be problems if a bailout is needed for Spain, which is Europe's fourth-largest economy.
On Wednesday, Spain's government took pains again to assuage fears. "An abyss separates Ireland from us," Deputy Finance Minister Jose Manuel Campa told the Spanish daily El Pais. However, his comments didn't seem to move the financial markets. Interest yields on 10-year Spanish government bonds rose to over 5 percent for the first time since 2002. Speculators fear the risk of bankruptcy in the country has increased.
But how dramatic is the situation? What differentiates Spain from Ireland? And everyone knows about the risks, but haven't there also been reform successes this year? An overview of Europe's five crisis countries:
Ireland - The Export Industry as the Trump Card
Ireland seemed to have prepared for the euro crisis. The government passed the first austerity measures back in 2008. By the end of this year, the cuts will have amounted to €14.5 billion -- or around 9 percent of GDP.
The latest round of cuts is even more drastic. Prime Minister Brian Cowen wants to cut another €15 billion by 2014 -- €6 billion will be cut in 2011 alone. The plan is to reduce the current budget deficit of 32 percent to 3 percent within four years.
Ireland long enjoyed a booming economy. But then suddenly in 2009 there was a catastrophic reverse with a deficit of 7 percent of GDP. Yet the recovery was almost as rapid as Germany's. In the first quarter of 2010 the country saw growth of 2.2 percent and the Finance Ministry expects the total for 2010 to be 1 percent. Next year growth is expected to be even stronger.
Yet the optimistic growth projections could quickly be reduced to shambles. The Irish are deeply shocked by the fact that the country has had to go begging to the EU and the IMF. Observers fear that the depressed mood could have a negative effect on the economy. The unemployment rate is already 13 percent and drastically reduced incomes will likely curb private consumption.
And high costs of many private mortgages poses another danger, as they have already removed much room for maneuver in many households. The private debts now far exceed the value of the houses, and this negative equity has led many Irish people to put up other forms of collateral to avoid losing their homes. In September the Irish Central Bank announced that just over 5 percent of mortgage-holders were in arrears for more than 90 days on their mortgage payments.
This percentage could increase substantially, because three quarters of Irish mortgages are based on variable interest rates, and with every interest rate hike by the Central Bank, the mortgage payments increase.
However, there is still cause for optimism in Ireland. The export industry has not been affected by the general paralysis. In fact, it is one of the most dynamic parts of the economy. Unlike many other indebted nations, the manufacturing industry is making as much money as during the boom years.
The industry is regarded as Ireland's trump card compared with other indebted nations. The growth in this sector alongside the austerity measures could lead to success. The Irish have to pick themselves up and make another collective effort. And, at least in the short term, they have to follow their government, that past experience has led them to deeply mistrust.
Portugal - The Next up for a Bailout?
The interest rate on long-term Portuguese government loans has recently been often over 6 percent, based on investors' concerns that the country may be the next to require a bailout from the EU-IMF euro rescue fund. In contrast to Ireland, Portugal's problem is not related to the banking sector or a real estate bubble. The country has serious structural problems. In the past decade, Portugal's economy has undergone little growth, its industry has become less competitive globally and unemployment has risen to more than 10 percent.
In 2009, new borrowing reached a record level of 9.4 percent. With austerity measures never seen before in the country, the Portuguese government wants to reduce its budget deficit this year to 7.3 percent, and to 4.3 percent in 2011. In addition, the country plans to raise its value-added tax (similar to sales tax) from 21 to 23 percent, and to raise taxes on corporate profits to 2.5 percent.
In addition, major infrastructural projects like the new airport and the construction of high-speed rail lines have been temporarily suspended. State-owned companies including energy utilities and banks are either to be fully or partly privatized, bring a total of €6 billion into the state's coffers. Savings are also planned in the public sector, with salaries for civil servants being trimmed by 5 percent.
But it is still uncertain whether the country's economy can grow enough to generate the tax revenues needed to reduce debt. The government in Lisbon is forecasting a mini-growth of 0.2 percent for 2011. The Office for Economic Cooperation and Development, however, fears the country could fall back into a recession.
The other problem is that the results of the country's savings program could come too late. This spring, Portugal must raise €15 billion to refinance old debts. Next year, the country must come up with a total of €40 billion. If interests rates don't fall, then the country will surely be forced to request aid money soon, as a way to prevent the crisis from spreading to Spain.
The problem is Spanish banks have been the leading investors in Portugal. As of June, the open exposure of Spanish banks to Portuguese banks, companies and the government in Lisbon totalled more the €57 billion. If Portugal falters, then Spain would be the next candidate for rescue. The rescue of an economy that large would push the rescue fund beyond its current means.
Spain - Litmus test for Europe's Rescue System
At first glance, Spain's financial situation is deceptive. Its public debt looks rather small compared to other EU countries, at just 53 percent of gross domestic product. According to the Maastricht Treaty, government debt is allowed to be up to 60 percent of GDP. Countries such as Ireland and Germany have significantly higher debt levels, at 65 percent and 75 percent of GDP respectively.
Nevertheless, Spain is in the middle of a serious crisis. The reason is the high level of unemployment, and the massive collapse in property values.
The financial crisis brought an abrupt end to a construction boom that had lasted for years and which had been largely financed by loans. Hundreds of thousands of Spaniards lost their homes, while 1.2 million found themselves out of work. Bad loans totaling €180 billion still place a burden on the country's financial institutions today, with half the loans being held by the savings banks, the cajas. The country plunged into a deep recession.
Since the spring, the government has been trying to forcefully fight the crisis, partially as the result of pressure from the European Union and the International Monetary Fund. Prime Minister José Luis Rodríguez Zapatero introduced an austerity package that goes beyond what any other country has done so far. He pushed for major reforms in the labor market, including the easing of job protections and a reduction in high severance payments.
In the next three years, the government wants to save a total of €50 billion through drastic cuts. An additional €15 billion will be slashed from the budget this year and next. To help achieve this end, the government is cutting civil servants' salaries and slashing subsidies. The goal is to reduce the budget deficit from the current 11.2 percent of GDP to under 3 percent by 2013.
An Entire Generation Dependent on Their Parents
At the same time the government is trying to increase its revenues. Back in the summer, it raised the rate of value-added tax (VAT) from 16 to 18 percent. But the Spanish reacted by immediately reducing their consumption, thereby delaying the economic recovery that was expected to follow the financial crisis even further. After a meager annualized growth rate of 0.2 percent in the second quarter of 2010, the economy stagnated completely in the third quarter.
But the Labor Ministry assumes that new jobs will only be created if growth hits at least 2 percent. And those jobs are urgently needed: The unemployment rate in Spain is at 20 percent, while among young people it is twice as high, at 40 percent. A whole generation is dependent on the support of their parents. They struggle to find jobs and get temporary contracts at best.
The next acid test will happen soon: Next year, Spain must raise €65 billion on the capital markets in order to refinance its debt. And that could turn out to be expensive. For example, on Wednesday, interest rates on Spanish 10-year government bonds rose to over 5 percent for the first time since 2002.
There is a lot at stake -- including for Germany. That is partly because German banks have lent about €134 billion to Spanish banks and companies. Another reason is the fact that the EU's €750 billion rescue fund was not designed to cope with the possible default of a large country like Spain. In other words: If Spain falls, so does the euro.
Italy - The Curse of the Relics
Italy has one of the highest pubic debts in Europe, the third highest in the world. But politicians in Rome insist these are old debts and that Italy has fared well in the global financial crisis.
What is true is that no Italian banks have required saving and unlike in Spain and Ireland, the real estate market did not collapse. The GDP last year was minus 5 percent -- the same as in Germany and the public deficit was also, as in Germany, 5 percent. Unemployment has risen slightly from 6.5 percent before the crisis to 8.3 percent. And this year the economy is even expected to grow slightly.
In short, Italy is far removed from the dramatic developments in Greece, Ireland, Portugal or Spain.
This is even more the case since Giulio Tremonti began to take on the mantle of a tough finance minister. He has repeatedly said that there is simply no money available to stimulate the economy. While other European countries implemented massive stimulus packages, Italy only spent around 0.1 percent of its GDP on things like cash-for-clunkers programs and other measures.
In the summer of 2010 Prime Minister Silvio Berlusconi's center-right coalition even introduced a hefty austerity program. In July, the parliament passed a bill that will impose cuts of €25 billion for 2011-2012. The main cuts were in the public service, with state employees facing a pay freeze for two years. Further billions were cut at local and regional levels.
Although Italy has so far escaped the crisis relatively unscathed, with few social tensions -- the fact remains that the massive public debt poses a risk. Italy has to pay interest rates that are 2 percent higher than in Germany on its 10-year bonds -- it may be far less than the interest paid by Ireland or Greece, but it is close enough to Spain. And while the financing of the Italian debt may be relatively solid -- the average duration of a bond is seven years -- Italy will still have to raise a fresh €273 billion on the markets in 2011.
The turbulences within the euro zone could quickly bring an end to the self-confidence on display in Rome. Particularly when the EU Stability Pact becomes stricter. If Italy if forced to quickly reduce its mountain of debt -- which this year is 118 percent of GDP -- then it could be in line for some really painful cuts.
Greece - Reform with Risks
The euro crisis started in Greece, and the danger of a state bankruptcy has still not been averted there. On the contrary: The government in Athens still needs more time to pay back its debts.
By the end of April there was no other way out for Greece. The country's debt burden was so large that Prime Minister George Papandreou had to apply for more than €110 billion in emergency aid from his euro partners and the International Monetary Fund (IMF). As a counter-offensive, the government was bound to a rigid savings plan.
What has followed since has triggered shockwaves throughout the country of 11 million. Until 2013, Greece is obligated to save more than €30 billion, which amounts to about 15 percent of its GDP. The goal is to force the federal deficit, which now is 15.4 percent, down to under 3 percent. This should be accomplished by, among other things, raising the value-added tax (VAT) from 19 to 23 percent, and by making tough salary and pension cuts for public employees.
The problem is that the country still teeters on the edge of federal bankruptcy. The country is deep in a recession, and the chances for economic recovery are small. The main reason is that up to 70 percent of the gross value added (GVA) of the Greek economy relies on domestic demand. The savings program, though, stifles private consumption. And in the middle of all of this, prices are climbing -- in October 2010, the inflation rate reached 5.2 percent.
More than €400 Billion in Debt by 2013
Over the past two years, more than 1,500 companies have relocated to neighboring countries. Revenues from tourism, the cornerstone of the Greek economy, have dropped by 25 percent since 2008. Unemployment is currently at 12.2 percent.
The biggest problem is the enormous federal debt. By the end of 2009, Greece had accumulated a total of about €300 billion in debt (127 percent of its GDP), and it's expected to have more than €400 billion by the end of 2013 (or 190 percent of GDP).
Then there is also the fact that Greece will have to pay high risk premiums in the markets, if it wants to get fresh money. A few weeks ago, Papandreaou offered up for discussion with his EU partners and the IMF an extension of the loan payments. In other words: The country only wants to pay back its debts later. But German Chancellor Angela Merkel is expected to resist such attempts.