Dangerous Levels of Euro Debt: Portugal, Ireland, Greece, & Spain

By Julian Knight

Some Eurozone members have bigger debt problems than others. Some countries, like Germany or the Netherlands, have relatively low debts, while Portugal, Ireland, Greece, and Spain owe a lot more money. Governments have to fund their debt by persuading investors that it is worth buying in return for interest. Before the financial crash this was easy for the Eurozone countries — even the ones with high debt — to do. But since investors have been less willing to invest in this debt for the following reasons:

  • Repayment fears: The global recession that started in 2008 has damaged many Eurozone economies and as result some investors fear that the weaker members of the zone won’t be able to keep up repayments on the debt they have already issued. These countries could essentially go bankrupt.

  • Lack of cash: The world financial crisis shrank the world economy, which means there was less money free to buy government debt. As a result, investors tend to look at the debt of “safe” countries first (like the United States).

  • Wealth shift to the east: Basically, the economies of places like India, China and Russia are growing fast. Wealth and jobs are moving from the West (Europe and the United States) to the East. This seismic shift in the world economy makes investing in the national debt of countries considered to be in decline (such as Portugal, Ireland, Greece, and Spain) less attractive.

Some Eurozone countries are in a vicious circle. They are in recession so the government collects less revenue from taxes, which means they have to borrow more money, but because they are in recession fewer investors are willing to risk loaning them money. With less money available to borrow, governments that face this fate have no choice but to cut their spending (referred to as austerity), which them pushes them into even deeper recession. See how difficult it would be to break this cycle, once it starts?

Individual national debts are assessed by the international credit ratings agencies, such as Moody’s and Standard & Poor’s. Among other things, this assessment tells investors how likely (or unlikely) it is for the individual country to default on its debt.

Although the Eurozone only has one currency, each individual member state of the Euro — 17 nations in total — manages its own public finances and issues its own debt for investors to buy.