Week 36, 2012: Eurozone Government Finances

Summary: Mario Draghi, the head of the European Central Bank (ECB), announced yesterday that the ECB would buy government bonds from struggling eurozone economies (essentially loaning them money) in an attempt to defuse any future crises. We take a look at the economies most likely to benefit from the scheme.

What does the chart show? The chart shows two things for each of the 17 economies that make up the eurozone.  The red bar shows the average long-term government bond yield (the official interest rate the government must pay to borrow money) in July 2012.  The blue bar represents the budget deficit (the difference between their expenditure and their revenue) that each government registered in 2011, as a percentage of their GDP.  Note that Estonia is the only country to have a budget surplus last year (they received more income than they spent), so their budget "deficit" is negative.

Why is the chart interesting? Although the new ECB measures are technically open to any of the seventeen economies should they need it, it is unlikely countries such as Estonia, Germany, Finland or Luxembourg are going to require such assistance.  Based on their current cost of borrowing, and their budget deficit last year, the most likely recipients of the new scheme are those on the left hand side of the chart (Greece, Portugal, Cyprus, Spain, Slovenia, Ireland and Italy).  

However, the ECB has stipulated that any country that applies for help in this way must first have applied to the EU and the IMF bailout schemes, and will have to accept "fiscal reforms" as a consequence of any bond buyouts.  We have already seen that these conditions rarely go down well with voters, so governments will be wary of applying for aid, at least until they have no other options.