Editor’s Note: President Obama addressed the British Parliament on Wednesday as part of his six-day, four-country tour of Europe. Dubbed as one of the key events of his trip, the president talked about the “essential relationship” between the U.S. and Great Britain. Mr. Obama’s visit comes as the U.K. and countries across Europe are implementing controversial austerity measures in the face of stagnant economic growth, in the case of Britain, and sovereign debt crises in the Eurozone.
Concerns about debt center on the so-called “PIIGS” (Portugal, Ireland, Italy, Greece and Spain). “The smaller countries, the periphery countries — Greece, Portugal and Ireland — are in deep, deep trouble,” Kenneth Rogoff of Harvard University told Jeffrey Brown on Monday. “But if they default on their debt, that hits the banks in the richer countries, and the governments there have to bail them out.”
We decided to look at the economic situations of eight countries, including the four on Mr. Obama’s itinerary, and how likely the troubled ones are to default on their debt.
A protester holds a banner reading ‘strike’ as he takes part in a demonstration in downtown Lisbon on November 24, 2010. Portugal’s first mass general strike in more than two decades brought the country to a halt to protest spending cuts the government said were vital to avoid financial disaster. Photo by Francisco Leong/AFP/Getty Images.
A tourist in Lisbon 20 months ago, I couldn’t figure out why the city was booming. And when I asked, no one seemed able to explain it. Instead, there was were monuments and memories of Portugal’s good old days — the 1400s through Lord Byron – and a national music — “fada” (fate) – that nursed the nostalgia. And resentment of Spain: “the only two things to come from there are ill winds and bad marriages.”
Portugal’s crisis? As with all the PIIGS, a poor country joins the Euro, gets to borrow at low interest rates because the Euro’s backer, Europe itself, is deemed too big to fail, and borrows a boodle which it can’t possibly pay back.
> Question: What percentage of Portuguese students graduate high school in this, the Information Age? Answer: 28 percent, less than Turkey or Mexico.
Implied odds of Portugal defaulting on its debt in a year, according to the Credit Default Swap market: 16-1.
Would you lend to Portugal? At what interest rate?
Read more: A New Look at Portugal’s Economic Picture
An Irish policeman is confronted by protestors as they break through the front gates of the Irish Prime Minister’s office in Dublin, Ireland, on November 22, 2010. Ireland was hammering out the conditions of an EU bailout package worth up to 90 billion euros, sending the single currency soaring but sparking fierce criticism at home of the already beleaguered government. Photo by Peter Muhly/AFP/Getty Images.
Bad real estate loans. Sweet low-tax deals to foreign corporations. Boom times in Ireland, of all places. Followed by…the bust.
I put the question to Irish economist Canice Prendergast in January:
“Do you default some time in the future?”
Said he: “I think we do. I think, at that point, then everything [Ireland’s sovereign debt] gets restructured.”
Odds of a default within a year: 16-1, and falling.
A protestor shouts anti-government slogans in front of the Parliament in central Athens, Greece on May 6, 2010. More than 10,000 people demonstrated peacefully in the Greek capital as lawmakers voted on a drastic austerity package, a day after protests against cutbacks degenerated into deadly riots, police said. Photo by Aris Messinis/AFP/Getty Images.
The glory. That was. Long ago.
The story? See our Portugal write-up in paragraph two.
How much does Greece have to pay to borrow money these days? 15 percent or so, next to which most subprime mortgages look like a steal.
And speaking of stealing, “eight out of 10 residents of central Athens claim to have fallen victim to a mugging, theft or burglary,” according to the Greek “e-paper,” ekathemerini.
Yes, our sources tend to the pessimistic, but this is what we tweeted on June 1 last year: “Ken Rogoff the other day, for upcoming piece: Greece will default, desert the Euro for the drachma. Tufts’ Yannis Ioannides didn’t disagree.”
CDS odds of default? 6 1/2-1
But on the Internet betting site, InTrade, the likelihood of default by Dec. 31 is 45 percent. By way of comparison, the likelihood of a Republican winning the White House, according to the betting on InTrade: 40 percent.
Read more: In Greece, New Austerity Measures Rile Many
Thousands took to the streets of Barcelona earlier this month to protest government cuts and high unemployment in Spain. The banner reads, ‘Enough is enough!!’ Photo by Diane Lincoln Estes.
It was what everyone called a “crushing defeat” for the ruling Socialists this weekend, who, amid street protests across the country, polled 28 percent of the total vote, compared to 38 percent for the conservative Popular Party. The reason given: a deteriorating economy with an unemployment rate above 21 percent, highest in the industrialized world, according to The Economist. For under-25s, the rate in February topped 44 percent.
And what exactly are the Conservatives going to do if they take power? More austerity, leading to even more unemployment? More honesty about Spain’s local banks, suspected to be sitting on mountains of bad real estate loans? See our February post from our Spanish sources.
Odds of Spain defaulting on its debt in a year: 38-1 on Friday, down from 42-1 the day before.
Germany’s economy is the largest in Europe and the fifth largest in the world in terms of relative price levels, according to the CIA’s World Factbook. It’s also a leading exporter of automobiles including BMWs. Photo by flickr user Dave Pinter.
The powerhouse of the Eurozone, Germany’s economy has been booming compared to its neighbors. Manufacturing exports have soared and unemployment is low, due to an educational system that stresses work preparation, with particular emphasis on apprenticeships and vocational training.
Germany’s problem is its neighbors. It bankrolls Europe’s bailouts. If the PIIGS sink, that will mean more firm action, more money. Are German taxpayers ever going to say “genug”?
A December, 2010 protest march in England against the Tory Coalition government’s public spending cuts in Norwich City Centre. Photo by flickr user Roger Blackwell.
Two and a half years ago, amid failing financial institutions and foundering stock markets, then Prime Minister Gordon Brown announced a bank bailout worth some $850 billion to head off a meltdown. Other countries, including the U.S., soon followed suit. Armageddon was largely averted but the financial shock sent the British economy into the longest recession since records began.
Britain has a huge budget deficit (about 10 percent of GDP). Among European countries, only Greece and Ireland are worse off. Prime Minister David Cameron has pledged to get his country’s bloated budget under control. Last year he unveiled the biggest spending cuts in decades, vowing to trim $130 billion by 2015 and raise billions more through tax hikes.
Thousands have taken to the streets in recent months to protest the austerity measures and some economists say the cuts are hurting Britain’s economy. Though the recession officially ended in ’09, growth is sluggish and inflation is high.
Poland will not meet the technical requirements to adopt the euro until 2015. In the meantime, the country remains on the zÅ‚oty. A ten zloty banknote, which features a depiction of Mieszko I, a tenth-century Polish duke, is currently worth about $3.56 U.S. Photo by flickr user Metaphox.
Poland has proved especially resilient in the wake of the financial crisis. In fact, it was the only country in the EU to maintain positive GDP growth during the economic downturn.
Ewa Balckerowicz, director of CASE, the Center for Social and Economic Research, in Warsaw told The New York Times that Polish banks maintained prudent lending policies before the crisis which is why there was “no bubble in the mortgage market and the private sector was pretty much unscathed.”
As the Times points out, “Poland was also lucky that, in contrast to Ireland, its banking industry was still small compared with the total size of the economy, with less potential to do damage. Household debt is relatively modest. Poland also benefited from the strong economy in neighboring Germany, which accounts for a quarter of exports.”
Moreover, Poland will not meet the technical requirements to adopt the euro until 2015, which meant that it maintained control over its currency, the zloty, throughout the crisis, while other European countries were bound by a common currency. “Certainly the fact that the zloty could be adjusted helped us,” Aleksander Grad, the Polish Treasury Minister, said in an interview.
Poland has made one of the most successful transitions to a market economy since emerging from communism in 1990. Still, today it faces its own headwinds: a high unemployment rate of almost 10 percent and sizable budget deficits.
Read More: Poland Rebuilds Government After Crash
Protesters run away from French riot police during clashes in Lyon in October, 2010. The riot police forced union workers away from blocked fuel depots in western France during strikes against government plans to increase the age for retirement. Photo by Philippe Desmazes/AFP/Getty Images.*
Like Germany, Europe’s second biggest economy is faring better than its Eurozone brethren. In the first few months of this year France grew at 1 percent, not exactly breakneck pace, but the fastest in five years.
But problems remain: unemployment is high and budget cuts imposed by the government to deal with a ballooning public deficit have been unpopular. In the past year, President Nicolas Sarkozy oversaw pension reform, which increased the retirement age by three years, a government spending freeze and the elimination of 150,000 government jobs. The moves prompted widespread protests.
Meanwhile, as Dominique Strauss-Kahn awaits trial on rape charges, French Finance Minister Christine Lagarde appears to be the frontrunner to replace him as Director of the International Monetary Fund. We spoke with the former swimming champ and fluent English speaker in Paris last summer.
With additional contributions from Diane Lincoln Estes and Elizabeth Shell.