An evolution of the European Public debt

Well, here we are again, and today we are going to talk about the evolution of the European Public debt.

In this occasion we are not going to find any correlation. We will just show one variable, the interest of long term state bonds. We are going to look at the interest of long term state bonds rather than at the very famous Risk Premium for the following reasons:

– The Risk Premium is not an indicator on how much money will be returned to investors in 10 years time, is just an indicator of the difference between one state’s interest rate and Germany’s interest rate.

– Risk premium can change, reflecting a change in either of the states, so only one variable is storing two different tendencies

– The only factor that can be used nowadays to measure the level of trust  is the interest rate offered by states on a 10 year term.

Apparently, bailing out the banks worldwide has a direct relationship with the interest rate. This is because investors (banks) do no trust that states can pay their bonds since they might have run out of money (because they were bailing out banks). Anyway, if the trust is low, the states can raise interest they offer for their bonds to attract investors. When this happens,  the banks are willing to invest the cheap money they got from the states (1%, for example), into state bonds (that range between 1.62% of Germany to whatever crazy amount Greece is offering right now). Of course, this investement has two effects:

– Money given to the banks is not used to reactivate the economy, since this money is not loaned to the general public, but back to the state

– The higher interest rate of debt, the more money form the yearly budget will be necessary to pay this debt, so less money for education, health, etc…

Ok, so let’s take a look at the data (obtained from OECD website). Let’s see the yearly evolution of the interest rate for 2009 to 2011

Scale is logarithmic to accent the differences in the lower values and smooth them in the higher values.

Well, first surprise. Reading the press we would agree that Germany is not doing as bad as other countries on the EU, but I guess we would not expect this state to find financing easier during the crisis, right? The Risk Premium raises for the other countries not only because they need to increase the interest rate but also because Germany is managing to find investors who are willing to accept lower interest rates. Actually, 1.6% is lower than what any bank offers in any fix term deposit (and some accounts).

So, the question is… Do you think Germany is somehow benefiting from the high risk of other state debts? Do you think this benefit can put Germany into a conflict of interest when defining its policy about European economic agreements and European Commission policies?

For ilustration purposes, we will show as well the monthly evolution of the interest rate in the last year

Scale is logarithmic to accent the differences in the lower values and smooth them in the higher values.

With this in mind we can percieve the short term variations of this indicator. I invite the reader to check if the high peaks for each country match with any particular event going on in the moment, and to answer the following quesiton:

Do you think investors are now in the position to press governments and populations to select the choices that are better for the investors but not necessarily for the population of the country?

And finall, the raw data.

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