Europe’s debt crisis: Storm clouds over Club Med

In the corridors of the Berlaymont building in Brussels, the home of the European Commissioners and their staff, you hear disparaging comments about the Club Med — the Mediterranean member states, including France, Italy, Greece, Spain and (erroneously) Portugal.

EU civil servants see them as freeloaders hooked on subsidies from Brussels that fund fictitious olive groves and fishing boats that scour a sea for disappearing marine life. These cynics have been having a field day with the plight of Greece, where a financial implosion has exposed not just reckless spending but the sovereign equivalent of false accounting. Previous Greek governments hid the level of their borrowings with derivative contracts (courtesy of Goldman Sachs) and then lied about the public finances.

For such offences, Greece has now been shut out of the bond markets. Much more worrying is the spreading infection of rising bond yields in Portugal and Spain. Neither has the scale of structural problems that afflict Greece, nor is their financial reporting in question. But the cost of borrowing for Portugal is now almost double that of Germany. For the moment, Portugal is not at risk but its economy is weak. Its growth over the past boom decade has averaged about 1 per cent, a factor that will hinder efforts to raise enough tax revenues to reduce debt.

The bond markets are in a deficit-intolerant mood. The hot money is flying to growth markets in Asia. No one wants to own debt issued by highly indebted low-growth sovereigns. Why buy Portuguese debt when Brazilian rates are as attractive?

For more: Europe’s debt crisis: Storm clouds over Club Med - Times Online