September 9, 2010
Like schoolyard bullies after the holidays, bond markets are again picking on the weaklings. This week the extra interest, or spread, that small euro-zone countries pay on their sovereign bonds compared with German Bunds widened sharply—to record highs for Ireland and Greece, and to levels not seen since May for Portugal. Ireland had been one of the tougher kids. But with its ten-year bond yields at 6%, investors can smell fear.
In December the Irish government pledged to reduce its budget deficit to 3% of GDP in five years. To meet that target it cut public spending for 2010 by €4 billion ($5.1 billion) or 2.5% of GDP, and committed to a further €6.5 billion budget adjustment before 2014. On that basis, it reckoned public debt would peak at 84% of GDP before falling back. Nervous bond investors are sure that target won’t be met but do not know just how high debt will rise.
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