The United States of America has committed about $12.8 trillion dollars in cash, new money printing, loan guarantees and other bailouts. That is an irresponsible amount of spending. However, it is small potatoes compared to what is going on in some of the smaller nations of Europe.
Europe has generally shown restraint. The Eurozone, as a whole, has committed less than half the sum committed by America. However, Europe is made up of a conglomeration of separate nation states, and each has a separate and distinct economic, tax and public policy concerning bailouts. Certain small European nations are at far greater risk of sovereign default than anyone realizes or currently admits.
The larger European countries, like Germany and France, are seriously not at risk of default. Their expenditures seem huge in absolute terms, but, as a percentage of GDP, the bigger nations of Europe have made moderate commitments to fighting the recession.
A lot of chatter relates to eastern European implosion risk. Austrian banks have committed about 70% of Austria’s GDP to the eastern area. But, largely underestimated is the very real risk that certain small European nations, including Ireland and Denmark, may come close to a sovereign debt default.
The following is a table of European governments' commitments (source: Bloomberg). All figures are in billions of euros and include capital injections, guarantees granted, effective asset relief and liquidity interventions.
- United Kingdom - 781.2
- Denmark - 593.9
- Germany - 554.2
- Ireland - 384.5
- France - 350.1
- Belgium - 264.5
- Netherlands - 246.1
- Austria - 165
- Sweden - 142
- Spain - 130
Several countries are problematic, but two stand out -- Ireland and Denmark. Ireland has a total of 4.15 million people. It has committed a total of 384.5 million. The United States population is 304 million people. Once we adjust for the different population of the two countries, Ireland is spending an amount that would be equivalent to the United States spending about $39.5 trillion, or more than 3 times what it is actually going to spend. The situation in Denmark is worse. Using the same formula, the burden on the Danish taxpayer is $46.3 trillion, or 3.6 times the burden on the US taxpayer. On top of this, both countries have average purchasing power parity income per person that is significantly lower than the average income of Americans.
The only thing that modifies some of this risk is the fact that neither country has run massive current account deficits for decades, like the United States. That being said, bond markets are just beginning to recognize the risk of Irish sovereign debt, and seem to be completely ignorant of the even greater risk posed by Denmark.
Disclosure: No positions in European sovereign debt.