Greece is giving us all an object lesson in the limits of credit card government. According to this morning's FT:
Luckily for the Greeks, the EU will not let them fail, and is reportedly putting together a bail-out. Unluckily for the Greeks, the EU (aka the Germans and the French) will insist on huge and immediate spending cuts and tax increases. The Greek government has lost control of the situation, and Greece may well be made an example of, specifically to encourage other debtor nations like Portugal and Spain.
"...anxiety over Greece rose in financial markets, driving Greek bond yields up to 7.25 per cent, closing on Hungary, a non-eurozone state bailed out by the EU and the IMF in 2008.
Greek yields have risen by more than one percentage point this week and by three percentage points since October.
George Papandreou, Greece’s prime minister, blamed “malicious forces” for stories about Athens seeking funds from China and elsewhere, which helped trigger the turmoil... investors warned they might shun Greek debt, accusing Greek ministers and bankers of mishandling the bond issue, which left some funds nursing heavy losses."
"Dr Doom" Roubini puts it this way :
Fortunately, Jose Luis Zapatero, Spain's premier, assures us there isn't going to be a Spanish disaster:
"If Greece goes under that's a problem for the eurozone. If Spain goes under it's a disaster."
Which is very interesting.
"Spanish public debt (52pc of GDP) is 20pc lower than Europe's average; our treasury spends 5pc of revenues on debt costs, less than France and Germany."
Because on that basis, Spain looks like a paragon of fiscal virtue not just compared to Greece, but also compared to us here in the UK.
We've looked at the following comparison chart before, but this time we've added Spain. It shows the OECD's latest estimate of structural fiscal deficits (ie the bit of the government deficit that will not disappear automatically when the recession ends). And as we can see, when it comes to borrowing, the UK is by far the worst of the bunch, worse even than the so-called PIGS (Portugal, Italy, Greece, and Spain):
Now, it is true that Portugal, Italy, and Greece are all currently worse than us in terms of debt outstanding, but we're catching up fast (see yesterday's blog on the Ring of Fire). And as Zapatero says, Spain's outstanding debt is actually lower than other countries, including us. According to the OECD, Spain's gross government debt is currently 67% of GDP (2010), whereas ours is 83% (remembering of course that this is just our official debt, excluding all the off-balance sheet Enron items).
And Zapatero also points to the importance of the debt interest burden - how much of the government's revenue has to go on paying interest costs. In Spain's case it's a relatively comfortable 5%, and that was roughly where we were before the bubble burst. Unfortunately, our debt interest burden is now escalating wildly. According to the Pre-Budget Report, it will reach 8.6% in 2010-11, and the IFS estimates it will reach 9.5% the following year.
Again, we've blogged this many times, under its more usual soubriquet The Doomsday Machine. The point that needs to be underlined is that for the last several years, our government has effectively enjoyed a debt holiday. The "golden legacy" inherited by Labour in 1997 included buoyant tax revenues and falling gilt yields (strongly reinforced by Mr Brown's decision on Bank of England independence - a confidence building measure that brought an immediate dividend in terms of lower gilt yields). Unfortunately, that holiday has now come to a sudden juddering halt:
And right now, we are headed straight back to where we started. And this time, in a world of globalised PIMCO markets, and no exchange controls, we are going to find that the consequences in terms of HMG's borrowing costs are much worse than they were in the 40s and 50s.