The 85-billion-Euro bailout of Ireland could not convince markets that the crisis would not spread to other indebted Eurozone countries. On Tuesday, the debt costs of Portugal, Spain, and Belgium touched all-time hit their highest levels in the Euro’s 12-year history. Late on Tuesday the S&P ratings agency placed Portugal on a credit watch over its huge debts, signalling that it would be the next country to ask for joint aid from the EU and IMF, as per BBC news.
Portugal’s central bank warned about the risks being faced by its banks. A failure of the Portugal government to consolidate public finances may lead to Portugal’s banks facing intolerable risks, the central bank warns. France has already come forward saying it would help support Portugal and Spain if the need arises. Financial officials in France and Germany accused investors of acting irrationally to the threat of financial contagion.
The yield on Spain’s 10-year bonds reached to 5.7% on Tuesday, a record difference of 3.05% compared with Germany’s 10-year bond. The bond spread for Italy’s 10-year bond was at 2.1 percent over Germany’s bonds and the Irish bond yield stood at 9.53%; the Portuguese yield stood at 7.05% for 10-year bonds. However, the yields for government bonds of these countries were reportedly to be lowered on Wednesday on speculation that the European Central Bank would take extra measures to save the Euro from falling, Reuters reported.
Reuters quoted a Citigroup economist as saying that the Eurozone crisis could soon spread to the US and Japan. The officials of ECB, EU, and EC are rushing to give statements to inject confidence among investors on Eurozone stability. Some analysts are expecting ECB to increase its bond purchase programme from Eurozone region governments, while some ECB officials are opposing such a move. Germany’s Chancellor Angela Merkel is one such, sceptical of providing further funds to indebted countries as that would force Germans to bear the lion’s share of the bailout programmes.
But Germany is increasingly facing a dilemma: whether to do more to save the monetary union or to leave it to disintegrate. On the other hand, they are forgetting the important fact that decreasing labour costs would lead to decreasing purchasing capacity among the people, which is the basic factor in increases or decreases in consumer spending. Thus, the measures taken by the governments to increase the productivity of capital are ultimately leading to a decrease in consumer spending, which pushes down the growth rate. This is the basic contradiction inherent in the capitalist productive system that forces unequal income distribution in society.
Portugal and Spain are going to raise fresh debt from the markets later this week. Portugal will auction government bonds worth 500 million Euros on Wednesday and Spain on Thursday. S&P said that the Portuguese government has not done enough to boost labour flexibility and productivity, which means that it did not decrease labour costs to help investments become more productive. There are several other ways to increase the productivity of private investments but these capitalist investors choose only lessening wages because it is the only factor that would increase productivity significantly compared to other factors.
The process for a country to tap the European Financial Stability Facility (EFSF) has become almost identical in every country. Such situations are made easily predictable for investors and analysts, thanks to the rush of heads of state to declare that their countries need no bailouts from the outside. It is not clear whether markets are forcing the countries to tap EFSF or their financial worries are forcing them to do so.
For example, Ireland was forced by Spain and Portugal to claim aid on fears that the contagion would spread to them. Though Ireland said it was funded fully up to the first half of next year, it was forced to tap the aid facility because of fears of contagion. Nevertheless, the Ireland bailout could not stop the contagion from spreading to other countries. Investors are demanding higher yields from the bonds of Portugal, Spain, Belgium, and Italy, even though Ireland was bailed out.
Greedy Finance Companies
If we remember that investors include not only individuals but also investment banks and other derivative funds and commercial financial institutions, we may get a clue about this. These investors are out to cash in on the critical financial situations of the most indebted Eurozone countries and push bond costs upwards. We may also remember that the Greek government had repeatedly requested the US government to control Wall Street banks’ betting on Greece’s debt. This means that, apart from the actual financial situation of the indebted countries, profit-motivated, greedy financial firms are helping to advance the date when these countries claim EFSF aid. If these financial firms would stop betting on debts of indebted countries, the situation would definitely be different.