Financial Times
December 13, 2010
Despite a €110bn bail-out programme that the European Union and the International Monetary Fund arranged in early May, Greek debt yields remain elevated. Ten-year Greek debt yielded around 11.5 per cent on Monday, 8.5 percentage points over comparable German obligations.
The Greek bail-out has been followed by a surge in yields on Irish, Portuguese and Spanish debt as investors shunned those obligations as well. In understanding this “debt contagion,” it is useful to examine the characteristics of the region’s debt crisis, as well as compare it with the experience of Latin American economies through most of the 1980s. Today, many of the once debt-ridden countries such as Brazil are growing rapidly, have ample foreign exchange reserves, and have become significant creditors to other countries. How did this transformation occur?
The euphoria following the formation of the eurozone led some lenders to believe that there was no greater sovereign risk in Greece than in Germany, significantly increasing exposure to the weaker economies. Similarly, in the 1970s, foreign banks believed global capital market integration had eliminated Latin American country risk. Symptomatic of the era was the oft-quoted statement by the then chairman of Citicorp, Walter Wriston: “Countries don’t go bust.”
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