Tag Archives: eurozone

Tracking The Downgrade of Europe (and Others)

When mutual and hedge fund managers want to buy fixed asset securities such as bonds, they rely on rating agencies for an assessment of default risk. This helps them to decide what a fair interest rate is on the debt to reflect the risk premium on their investment. Needless to say, if you are an institution trying to raise money, te lower the agencies’ ratings on your debt the more you will have to pay in interest.

Where the real problem comes in is if you already have a high debt load accumulated over a long period of time. You are regularly faced with old debt maturing. Since you are already treading water, you need to roll over the debt or in other words, refinance or reissue it. The problem with paying higher interest rates is not immediate, it is down the road (see: “Understanding Debt“).

Eurozone debt web: Who owes what to whom?

This is the link to an interactive graphic showing the complex web of debt obligation in the eurozone as well as with Japan and the US. Clicking on a country name causes arrows to appear whose width and directions indicate to who the debt is owed and the relative size. As a country is selected, numerical statistics on the debt are also presented.

A secong graphic of the European debt web was published by the New York Times, October 22. To see it, click on the image and a re-sizable version will open. It is available as an interactive graphic online.

Commentary

It should be noted that this is foreign debt, not government or sovereign debt which may be a component of foreign debt. As a result, the foreign debt of a country is considerably higher than the government debt in most cases. Japan is an anomaly as most of its sovereign debt is held internally by its people. The US is about even. Ireland’s debt situation is astronomical compared to other countries.

As Zero Hedge notes, debt is a bilateral instrument. It is a liability to one party and an asset to the counterparty. Net foreign debt would be the result of taking into account both monies owed and monies lent but is not given in this case. Any serious study of the graphic should be accompanied by reading the notes appended to it.

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