Wednesday, May 4, 2011

Portugal Accepts More Debt

The global government debt crisis continues forward day after day as the debts continue to mount and the pressure builds on the financial system.

We witnessed another piece of the broken system bandaged up this morning when it was announced that the final tally on the Portugal bailout will be $116 billion.

As a reminder, the Portuguese government cannot pay their current debt.  Giving them a credit card loan only compounds the problem and does nothing to solve the fundamental issue.  I discussed this in detail in Would You Lend $100,000?

We have had the opportunity to witness this effect first hand since I wrote that article.  The bond market, after having the chance to digest the original Greece bail out, has now once again turned against the country.

Yields on their debt have soared in the last few weeks.  This compounds the problem for Greece because as interest rates rise it becomes even more costly to keep up with payments. (Think of your credit card, auto loan, and mortgage rates doubling)

Ultimately, all European countries will face this dilemma. The problem is not liquidity (provided with the bailout) but solvency.

With the Portugal bailout secured and their problems pushed down the road for a few months, all eyes will move toward Spain and Italy which are the next likely dominoes to fall.

Spain is monstrous in size and will provide a major test for the EU bailout project.

No comments:

Post a Comment