Living on credit

They call themselves 'True Finns' and oppose bailing out heavily indebted euro zone countries like Greece. After they became the third-biggest party in Finnish elections on Sunday and are likely to be part of the government, they are calling for stricter conditions for a bailout deal for Portugal.

However, most financial analysts agree that it is not very likely that Finland will prevent a deal altogether or leave the single currency.

"But it will show that Portugal has to tighten the belt quite quickly. A solution must be found as soon as possible, so that Portugal can get help," Allan Valentiner, head of fixed income at Johannes Führ Asset Management in Frankfurt, told Deutsche Welle.

The global financial crisis is far from over, as International Monetary Fund (IMF) Director General Dominique Strauss-Kahn reminded financial policymakers and central bankers at the IMF and World Bank spring meeting in Washington last weekend.

Greece, the first European country saved from defaulting by the EU and the IMF with a 110 billion euro bailout last year, still has a hard time refinancing its gigantic debt. This week, the interest rate for Greek two-year bonds surged to 20 percent.

Philipp Vorndran, global fixed-income chief strategist at Flossbach von Storch asset management in Cologne thinks it will be getting more difficult for European governments now to agree to common rescue measures.

"Slovakia and Finland could refuse to spend taxpayers' money for bailouts – and there's a high risk that people in Portugal and Greece realize that perhaps it would be better for them to leave the euro."

With its own currency depreciating against the euro, Greece could, for example, attract more tourists, especially those who don't feel comfortable traveling to Egypt or Tunisia.

'Solvency tsunami'

But there is more to the current crisis than sky-high eurozone debt.

"The euro is not the reason that we have all the problems we have on the solvency side right now. We have similar situations in the UK, in Japan and the US," Vorndran explained.

On Monday, this situation caused the debt ratings agency Standard & Poor's (S&P) to threaten the US government with a downgrade of the AAA credit rating for US Treasuries. S&P, as well as other credit rating agencies, have been urging the US to find a way to slash the yawning budget deficit and lower public debt.

Between 2000 and 2010, the amount of money in circulation in the US grew by a record 90 percent, while during the same period the US economy only grew 53 percent. Every time there was economic trouble on the horizon the Federal Reserve started printing money and flooded the markets with dollars. The result was short-term economic growth founded on credit.

Over the years, most industrialized countries were facing sky-high deficits and debt - or a 'solvency tsunami,' according to Vorndran.

"It's an issue that is around in a lot of developed countries. Japan is the most prominent representative with an indebtedness relative to gross domestic product of higher than 200 percent. But it is equally a problem in the US and the UK. And within the euro zone we have a lot of countries by the name of Portugal, Ireland, Greece, Spain, Belgium and Italy, which will face very tough times going forward."

"Out-Greeking the Greeks"

Bill Gross, founder and CEO of Pimco, the world’s largest bond investor, always had a reputation for critisizing US budgetary policy. But when he announced that Pimco’s flagship 'Total Return' fund had got rid of all US Treasuries and that Pimco was even betting against them – it was a wake-up call for international investors. Gross was one of the first prominent financial players to compare the US debt situation with Greece: “We are out-Greeking the Greeks."

No easy way out

Most certainly the times when government bonds were deemed a safe, risk free investments are over. But aside from that, nobody knows what the outcome of the current debt crisis will be.

There are usually three ways to resolve a debt crisis, through a bailout, a default or through economic growth. When it comes to Greece, Vorndran is not very optimistic.

"Growth is not very likely – at least not in the short term. We think in terms of Greece it's quite obvious we will see some kind of restructuring of the debt. More or less every responsible person is debating how this is going to happen and when."

Allan Valentiner is more optimistic: He thinks in five years time the euro zone will have overcome the current debt crisis with renewed financial muscle.

"Letting countries go into default is very popular with a lot of voters, but the economic implications would be much more difficult," indicating that it's in the EU's interest to find a way out of the mess.

Author: Thomas Kohlmann
Editor: Nicole Goebel