Euro debts – livin’ LARGE in euro land.

A brief peek into euro land debt might give a picture of what to expect in the next few months.

Everyone keeps talking about how Germany will/must/can bail out Greece – oh and France as well of course. I think before we feel the solution is at hand if only Germany would grasp it, we should remember Germany and France have their own debts. Germany, in 2010 needs to borrow around €340B, France about €375B. This figure includes all their financing needs – old bonds that mature and needs re-financing, short-term debt that needs to be rolled over, and dealing with deficit.

Germany is an economic power-house BUT €340B isn’t chicken feed. Germany relies on exports and their customers in euroland are all getting poorer and are going to be buying fewer Mercedes. This figure is also BEFORE adding any bail-out costs for Greece.

Now consider that Greece may be €120B over the next three years and you can see the extra cost could be quite a percentage increase. The sort of thing the bond market tends to find important and possibly unsettling. Unsettling because they might think this isn’t borrowing that will ultimately make Germany MORE of a power-house. It is borrowing that will detract from investment in that power-house.

But this isn’t what unsettles me. It’s Italy which does that. By my reading of the figures Italy’s total funding need for 2010 is only a tiny fraction less than Germany’s. And it is a higher percentage of their GDP. This IS worrisome. It relates the the post before this one. Italy doesn’t have the earning capacity of Germany so the debt will be much harder, actually impossible, for them to deal with though earning. Which means, of course they will have to borrow.

Spain too has a hang-over. A 150-180B euro hang-over. And with the news that, accidentally released figures show unemployment in Spain increased again to 20% – 1 in 5 unemployed – well, you can imagine the tax take is not going to be bulging whereas the welfare bill will be. So unless the unemployed all find gold in their back gardens Spain is going to be short of cash and shorter still of earnings.

2010 is when the jaws of the debt trap begin to creak into action A possibly slow but definitely relentless biting kind of action.

OK that’s borrowing.

Talking pure deficit, Germany and France still top the tables. Germany €125B and France €96B. Again this is before any bail-outs for friends and neighbours. Italy’s deficit will be about €80B while Spain will be about €90B.

What all this deficit and old debt maturing means, is that we will see all these countries as well as smaller ones like Belgium (which is small but swelling up with bank debt like a pustule) and grumpy in-denial ones like GB, are all going to HAVE to have more auctions and sell more debt. To whom? Is always my question. And I think you know my dark suspicion.

Last thing to mention is how much of this debt is short term, needing to be rolled over. The first thing governments who are having problems with debt do, is to start to sell short term debt. It is easier to get buyers and should cost less. HOWEVER, it also makes your over-all situation more unsteady. The more of your debt is short term the more often you have to keep coming back to the markets. Long term debt is done, out of the way and the money is yours for a decade or more. Short term debt is like having to sign on the dole every week. It takes time, makes you feel bad and every time you worry they’ll say NO. Not this week.

France and Italy both have a LOT of short term debt that has to be rolled over. France has €281B. Italy has €240B. Spain has 100B it must roll over.

All this short term debt means plenty of instability and chances for someone to come up short with a no-bid auction.

Nevertheless,I believe there will be a large market for debt even with the worries there are. Because debt is not so unlike stocks. No one buys debt to make money from holding it until maturity. No one except other countries. No more than stocks are bought to hold. The modern market in both shares and bonds/debt is all about buying it and selling it again as soon as its value swings in your favour. Buy low sell high. If you can buy lots at a time (ie you are a BIG player – think BIG bank, with LOTS of cash – think bail out money) then you can make billions speculating on tiny moves. All you need is instability. Lots of worries to move the cost one way and lots of government interventions and assurances to move it back. All you then need is luck, judgement or perhaps an unfair advantage of some kind that I can’t possibly imagine.

Of course it is a dangerous and ultimately destructive game of speculation that often kills the debtor (think Greece). But it is lucrative and the ONLY way to make the kinds of profits the BIG banks need to survive.