The Euro Crisis Is Back With A Vengeance

From Greece to Spain To Italy ... and back again. The euro zone domino effect takes another spin.

By Jan Hildebrand
DIE WELT/Worldcrunch

BERLIN - That little group of European problem countries is growing again: Spain and Italy are once more on investor radars, alongside Greece. On Monday, yields for the government bonds of both countries rose markedly. While the interest rate for German bonds -- considered a safe investment option -- was a puny 1.37%, for Spanish bonds it was 6.41%: the highest it's been since the euro was introduced.

The reason for investor doubts is the escalating bank crisis. Spanish financial institution Bankia, which is partially state-owned, asked Madrid for help, saying it needs a further 19 billion euros in bailout cash. That is substantially more than had been feared, making it clear that Spain must undertake drastic austerity measures in order to get a handle on its deficit.

And now Bankia has increased the government's burden. Spanish Prime Minister Mariano Rajoy, however, denied speculation that he planned to use the euro bailout fund to help the bank. "Spanish banks will not receive any European bailout money," he stated.

Rules from the euro zone bailout mechanism EFSF prohibit the direct support of banks: monies must flow to the country concerned after they have applied for help. Recently, however, there have been appeals from various quarters such as the International Monetary Fund (IMF) to soften rules and make it possible for bailout funds to be paid directly to banks. The German government is opposed to this.

Rajoy does not in any case see the Bankia problem as the cause for the latest financial market turbulence; he blames Greece. "Everybody knows that Spain is doing everything to reduce its deficit," he said. "But there is general uncertainty about the situation in Greece." The possible Greek bankruptcy and departure from the euro zone indeed could be the biggest danger to Spain.

The same holds true for Italy. The third largest economy in the currency union is also under pressure. On Monday, Italy did succeed in raising 4.25 billion euros on the capital market, but interest rates were higher than they had been at previous auctions. Investors wanted 4.04% on two-year bonds which is 0.7% higher than a month ago. By way of comparison: Germany was just able to get money over a two-year period practically for free.

When elections drive economics

This situation is a clear indication that the euro crisis, following a short respite, has hit the financial markets again with a vengeance. Yields for Spain and Italy still haven't hit last fall's record highs -- when the countries had to pay 6.7% and 7.2% respectively and further escalation was only prevented by the intervention of the European Central Bank (ECB) -- but the trend is clear: investors are getting increasingly edgy.

The mood follows on the election results in Greece, with the left-wing coalition Syriza now second strongest, and its leader Alexis Tsipras refuting the reform programs that had been agreed on with the EU and the IMF. The Europeans have made it clear that there won't be any more aid payments if Athens doesn't stick to the terms of the agreements. Should Tsipras win the June 17 elections, it could lead to the country's bankruptcy and departure from the euro zone. That anyway is the message many European capitals are sending.

The warning might be bearing fruit: according to the most recent polls results, the conservative Nea Demokratia party together with the socialist Pasok just might constitute a majority this time, and both say they intend to stick to the austerity course. The Athens stock exchange reacted positively to the news and the prices of stocks -- particularly Greek bank stocks -- rose.

Meanwhile, German business groups criticized German politicians for bringing up a possible return of Greece to the drachma – it only fuels the mood of uncertainty, according to Martin Wansleben, who heads the Association of German Chambers of Industry and Commerce (DIHK). "Nobody in Europe would benefit from Greece leaving the euro zone," he said.

Hans-Peter Keitel, the president of the BDI Federation of German Industry, warned that Greece leaving the euro zone "would be an experiment with an uncertain outcome. Nobody really has a handle on what the risks would be." For his part, the departing head of the European Aeronautic Defense and Space Company EADS, Louis Gallois, told Die Welt: "There is a risk that Greece will leave the euro zone. That could lead to a domino effect and take other countries along with it."

Meanwhile, travel giant TUI has been advising tourists going to Greece to take a lot of cash with them so that they will not run into difficulties should there be a run on the banks there.

Read the original article in German

Photo - gaelx

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Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum


SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.

It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

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