John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 29 May 2015 at 10:15 GMT

Why Greece matters to the other crisis countries

Blogger / MoreLiver's Daily
  • Non-performing loans of crisis countries' banks worry IMF
  • Crisis countries depend on the goodwill of EU and Germany
  • Upcoming elections might break down this pattern of muddle-through

By Juhani Huopainen 

The way Europe handles the Greek problem is more important than many understand. The issue is what to do with a country that has a debt sustainability problem, especially after the debt has been transferred from the private sector to the official sector (other euro area members, the International Monetary Fund, European Central Bank, European Financial Stability Facility).

If Greece’s debts are cut to a sustainable level, the official sector would have to recognise losses. If the debts are not cut, and Greece is not given more money, Greece will default on its debt and again the official sector would have to recognise losses. 

Greece’s debt already has long maturity and low interest rates, so restructuring it without losses to creditors is not feasible.

As either choice leads to the same outcome, one could easily think that the problem would be easy to solve. But this is where politics come in. 

However the Greek crisis plays out, countries like Spain, Italy and Portugal, but perhaps also Ireland, could begin to present demands for less austerity and a restructuring of their own debt.

A Greek default would have big consequences for countries such as Portugal. Photo: iStock  

The crisis countries are not OK

Remember, even though bond yields were pushed historically low with the help of the European Central Bank, the debt loads of the euro crisis countries remain high. Portugal’s and Italy’s debt to GDP is around 130% and Spain’s over 100%.

Greece’s debt to GDP is 180%, but this does not imply that the coast is clear for the other countries that have lower debt ratios. During deep depressions many private sector debts sooner or later end up becoming public sector’s debts. 

The sum of Portugal’s public and private sector debt is around 380%, while Greece’s is only 290%.

High private sector debt would not be a problem if the debt is low risk, but unfortunately that is not the case in the crisis countries. In Cyprus and Greece, a whopping 40% of all bank loans are non-performing. 

Other crisis countries exhibit less extreme, but equally worrying NPL-rates: Ireland 30%, Italy 17% and Spain 12%.


Source: April 2015 IMF Global Financial Stability Report

NPL Breakdown

Source: April 2015 IMF Global Financial Stability Report

NPL Provisioning
Source: April 2015 IMF Global Financial Stability Report

A bank loan becomes non-performing when it has not been serviced for 90 days – because the debtor cannot make interest- and principal payments on the loan. The eventual recovery rate is a big unknown – some of the NPL-loans will be paid in full, but many will not.

Handling the NPLs requires European co-operation

The money to cover the NPLs must come from somewhere, and rules will have to be bent. While Germany’s threats to Greece continue, the crisis countries have lined up to Germany, because they would rather help Angela's Merkel’s government politically in the hope of getting a favour in return when the banks’ books are restructured.

The alternative for the current leaders in the crisis countries would be losing the creditor countries’ goodwill, which would lead to sanctions from the ECB (mark down the NPLs immediately and recapitalise your banks at any price, tighter collateral practices, only limited Emergency Liquidity Assistance – just like in Greece) and Brussels (your budget deficits are out of order, welcome to the excessive deficit procedure). 

The Spanish deficit, especially, has not received much attention from Brussels. 

But what if the current leaders are ousted in Portugal’s and Spain’s elections later this year – and replaced with eurosceptics and left-wing parties? Or even if they just lose enough votes that they could not form effective governments anymore?

Spanish protest
Could elections in Portugal and Spain see goodwill from creditors squandered? Photo. iStock

Recent price action suggests minor nervousness – for now

Euro area’s government bond yields hit a bottom around mid-April. Since then, yields rose until mid-May, when the German 10-year yield turned down from a high of 0.77% to 0.53% currently. But the yields of Italy and Spain have remained near their mid-May highs, and the Portuguese yield has actually increased a little.

The bond yield rally pushed the ECB to announce “front-loading” its bond purchases before the quieter summer months – this ended the yield rally and hit EURUSD.

Country-specific ETFs show how since the crisis begun Germany has performed far better than Spain and Italy (USD-quote, indexed to December 2007)
Chart source: Saxo Trader

From the beginning of 2014 all the markets have moved hand-in-hand. In 2014 the crisis countries over-performed Germany as a stronger recovery was expected, but prices are now back in line. Portugal was and is an underperformer.
Europe etf2
 Chart source: Saxo Trader

More on the topic:
– Edited by Oliver Morrison

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.
fxtime fxtime
Great article.
I suspect the ECB do not consider the bigger picture that you correctly describe. They react to the immediate problem(s) only and never truly plan anything and so they hope Spain et al will not demand the same debt restructuring about to be given to Greece .....but even if Spain do make demands ...that is an issue months away as far as they are concerned. Long Term planning is not a speciality of the ECB/EU. In the mean time we all pay for this largesse.
Juhani Huopainen Juhani Huopainen

The long-term picture requires things that are politically impossible now, or would have severe consequences at least in the short term. Draghi is not stupid. Surely he understands the flaws and the situation very well. I am not that certain that certain other ECB board members understand the situation that well.


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail