The chart below measures each European nation's budget deficit as a percentage of its GDP; three of the five PIIGS countries (Spain, Greece, and Ireland) lie to the far right (exclude the EU16 and the EU 27). Italy's debt load looks manageable absolutely and comparatively, until you dig deeper. For some reason, Portugal is not shown.
click to enlarge
Of the five nations, only Ireland does the necessary heavy lifting, the painful work, to close its deficit; meanwhile, the dream of easy money continues for the other nations. What happens, though, if that dream becomes nightmare? Perhaps interest rates rise, as they will, and the debt service load becomes unmanageable -- what then? Perhaps no buyer anywhere steps forward at any blandishment (rate) to own more of that nation's sovereign debt -- what then?
Really, there once was a cycle for this type of event. When interest rates dropped, debtors would re-finance at better terms and longer terms to lock in the low rates. The result was increased liquidity for the debtors, which enabled them to withstand the other side of the cycle, increasing rates.
Not now, though; certainly not for the countries in Europe. (And not for England, Japan, and the US, which all are in equally parlous financial condition.) Does there exist a tipping point that investors perceive to be too much debt? Is this really one giant con game -- investors conned and no one convicted?
Which leaves us with Dorothy Parker's memorable phrase, "Eat, drink, and be merry, for tomorrow we may die." Except this time, few enjoy the party, I fear... and the piles of debt just keep growing larger and larger.