Interest rates have risen recently on the government debt of Italy and Spain. As of the market close on Monday July 11, the 10-year government notes for Spain were yielding 5.9% while Italy's 10-year yield was 5.5%. Compare these rates to the 10-year German bund rate of 2.8% at Monday's close.
When it comes to debt problems Greece has been the European country in the headlines. We must understand that Greece is a relatively small country with a population of 11.2 million, a GDP of $318 billion and total public debt of $450 billion. Greece is a real problem, but still we must recognize it represents only 2% of the European Union (EU) GDP.
The increase in yields in Italy and Spain are indicators that the contagion of debt problems may be spreading to bigger countries in the EU. Italy has GDP of $1.8 trillion and public debt of $2.1 trillion. Spain has GDP of $1.4 trillion and public debt of $880 billion. One can easily see that these countries are much larger than Greece, and problems here would be much more difficult for the healthier EU countries such as Germany to deal with.
It will take many years for the European sovereign debt problems to get resolved. What we all need to keep a close eye on is whether or not these problems can be solved in some orderly fashion or whether a disorderly contagion spreads to the larger countries. The more chaotic the process, the more costly it will be in terms of reduced world growth and reduced asset prices.