When I look at this chart I see 5 countries whose interest rates were as low as Germany’s rates until 2009. And then suddenly all hell broke loose. Their debt loads were extreme in 2008, but no one worried about it until the shit hit the fan. The U.S. has ten year rates of 1.6%, but our debt load accelerates by $3.8 billion per day. It won’t matter until it matters. Then our shit will hit our fan.
Saturday, Greeks will head to the polls in a second attempt to form a government — an election/government that may ultimately determine if Greece remains in the euro zone. While the implications for Greece are dramatic, there is concern that a Greek exit would threaten other euro zone members (e.g. Spain and Italy) and potentially test the ability of European institutions (e.g. the European Central Bank) to prevent contagion. Today’s chart helps illustrate the risk of European debt by plotting out the 10-year government bond spread (versus the German Bund) for all the PIIGS (i.e. Portugal, Italy, Ireland, Greece, and Spain) from 2007 to the present. For example, the Greek 10-year government bond yield (light blue line) is currently 27 percentage points greater than that of the relatively stable German Bund. That is a far cry from where it was back in the summer of 2009. Currently, however, many are focused on the third and fourth largest euro zone economies (i.e. Italy and Spain). A run on the financial institutions of these more substantial economies would have global implications. It is noteworthy that the Italian and Spanish 10-year government bond spread has not declined after the ECB offered three-year loans in December and February.