Economics, 3rd Edition

802  PART 15  INTERNATIONAL MACROECONOMICS

Sovereign Debt

Three years after the height of the sovereign debt crisis, are the sacrifices made by the 

countries who asked for a bailout and the EU showing any signs of bearing fruit?

The PIIGS – Three Years On

The first quarter of 2013 saw some 

optimism returning to financial mar-

kets around the world. The stock 

market in the US rose as did the 

London Stock Exchange. Bullish 

sentiment on stock prices was 

driven in part by more  

optimistic 

economic news coming out of the 

US and by the feeling that the worst 

of the sovereign debt crisis had 

been weathered. The banking crisis 

in Cyprus did set back sentiment but 

the relatively speedy agreement to 

organize a bailout seemed to calm 

nerves once again. What of the rest 

of the euro area? Is the cause for 

optimism backed up by what is hap-

pening in sovereign debt markets?

In the latter part of March 2013, 

Italy sold 

€3.9 billion in five-year debt 

but the yield rose from 3.59 per cent 

to  3.65 per cent, the highest since 

October 2012 and analysts noted that 

the demand for the debt was ‘soft’. 

Italy also sold 

€3.0 billion of ten-year 

debt and the yield here fell from 

4.83  per cent to 4.66 per cent. In the 

same month, Spain sold 

€5.83  billion 

of three- and six-month treasury bills 

amidst stronger demand and a lower 

yield (0.79 per cent compared to 

0.85 per cent).

At the same time, Greek banks 

announced losses, after a 

€100 billion 

write-down in sovereign debt. The 

National Bank reported losses of 

€2.14 billion for the year in March 

2013, Alpha Bank reported losses 

of 

€1.09 billion. Both banks are part 

of the recapitalization process that 

is a term of the continued funding 

arrangements from the EU. Both 

banks need to ensure that at least 

10 per cent of any new capital they 

secure comes from private investors. 

Ireland, meanwhile, managed to sell 

debt on the markets for the first time 

since 2010 and the Irish Taoiseach, 

Enda Kenny, noted that the country 

had made considerable progress 

in its plans to leave the bailout pro-

gramme it agreed to in 2010. Part of 

the Irish government’s plans include 

ensuring that promises made by the 

EU to help Ireland develop initiatives 

such as guaranteeing young people 

the right to receive training are acted 

upon. The Taoiseach said that ‘… it’s 

absolutely critical for governments to 

be able to bring people with them and 

to explain both the nature of the prob-

lem, the scale of that problem, the 

plan and the strategy to deal with it’.

The ratio of public debt to GDP in 

Portugal rose between the second 

and third quarters of 2012 and 

reached  120.3 per cent, up from 

117.4 per cent. Yields on Portuguese 

debt are falling, however; ten-year 

government bonds attracted a yield 

of 12.5 per cent in mid-April 2012 but 

a year later yields were hovering 

nearer the 6 per cent mark. Ratings 

agencies, however, confirmed that 

they retained a negative outlook 

on Portuguese debt with Moody’s 

rating it at Ba3 (the equivalent 

of BB- or non-investment grade, 

speculative).