The capital markets have begun to believe the deficit and debt problems in Ireland and Greece may overwhelm political efforts to balance national budgets.
The yield on Ireland's 10-year sovereign bonds rose to 7.42% -- five percentage points above German debt, which is considered the safest in Europe. Ireland says it will have to cut €15 billion from its budget over the next four years, more than twice the €7 billion proposed just months ago. And the critical Anglo Irish Bank has nearly failed, adding the bailout to Ireland's other costs.
The public deficit, Irish Finance Minister Brian Lenihan said, would hit 11.9% of GDP, while total net debt would reach 70%, according to Bloomberg. That does not include the costs of salvaging the big bank. The Ireland debt problem is exacerbated by lethargic economic growth, which is also seen in many other Western nations as a result of the recession.
The situation in Greece is not much better. Yields on 10-year Greek government bonds moved up 10 basis points to 10.67% Tuesday. Many global capital markets investors believe the $150 billion short-term loan put in place by Eurozone nations and the International Monetary Fund may be adequate for the next year, but the Greek debt is so high that the ability of the nation to use austerity to cut deficits will be ineffective in slashing long-term sovereign obligations to manageable levels
Will either nation default outright on their bond obligations? If they do, the banks and capital markets investors holding the debt will most likely bear the brunt of the failures.