Professor Rogoff is discussing that the odds are higher than 50% for another bailout for a EU member country. He mentions that 3 countries (Ireland, Portugal and Spain) have very similar debt to GDP ratios that lead up to the Greece bailout. Harvard Professor Rogoff is not slouch on this subject, he co-author a wonderful book on financial crisis and causes called “This Time is Different”.
An interesting fact is the fact of the yield spread between Germany and all those above countries bonds is widening. This is a good indication on what investors are thinking when it comes to these countries. The higher the yield means they are saying there is more risk of default on their debt. If we do see more bailouts or any defaults on Euro bonds this will be a huge test to keep the monetary union together.
An IMF bailout would be the worst that could happen, the terms that the IMF will request are usually very harsh on a country and all the above countries are considered 1st world countries so it would also be very embarrassing as well. Investors worldwide are pricing in a recovery and everyone is claiming inflation is tamed. It is very hard to figure out who is right when you read these types of stories.
Greece is unlikely to be the last euro nation to need an International Monetary Fund bailout, with Ireland, Spain and Portugal “conspicuously vulnerable,” said Harvard Professor Kenneth Rogoff.
“It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three years,” Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. “The budget cuts needed in Europe in many countries are profound.”
Portuguese, Spanish and Irish bond yields jumped last week as investors questioned their ability to reduce budget deficits and avoid Greece’s fate. Greece on April 23 triggered a 45 billion-euro ($60 billion) rescue package from the IMF and the euro region after its soaring deficit sent borrowing costs surging and sparked concern about a default.
At 14.3 percent of gross domestic product, Ireland had the euro region’s largest deficit last year. Greece’s was 13.6 percent, Spain’s was 11.2 percent and Portugal’s 9.4 percent.
Analysis: This does not bode well for the Euro in any stretch and this will test the cohesion of the European Union. I am going with Rogoff on this one that we are seeing more bailouts before the crisis is officially over.