interest compound spiral?

[Fittster]

From an article in the Telegraph about the state of Greek finances:

"Yields on 10-year Greek bonds surged to 5.75pc, a spread of 254 basis points over German Bunds. Borrowing costs are nearing levels that risk setting off an interest compound spiral. The public debt is already 113pc of GDP. S&P said it is likely to reach 138pc by 2012. “The increasing debt-service burden narrows the scope for debt stabilization,” it said"

Can anyone provide an explanation for the term 'interest compound spiral'?

[FarleyRusk]

Not heard that term before. I expect they mean a 'compound interest spiral' which would a term for the fact that if you don't repay the interest then the amount you owe will grow exponentially.

I am wondering if GR is due to be leaving the Euro anytime soon?

[the_smalls]

Fittster said:

From an article in the Telegraph about the state of Greek finances:

"Yields on 10-year Greek bonds surged to 5.75pc, a spread of 254 basis points over German Bunds. Borrowing costs are nearing levels that risk setting off an interest compound spiral. The public debt is already 113pc of GDP. S&P said it is likely to reach 138pc by 2012. “The increasing debt-service burden narrows the scope for debt stabilization,” it said"

Can anyone provide an explanation for the term 'interest compound spiral'?

Despite some Chrimbo drinks, I shall make a stab.

Greece currently spends more than it earns, thus needs to borrow. The more they borrow, the more nervous investors (i.e lenders) become. This increases the risk premium, i.e. effective interest rate (lower bond prices). Greece's next round of borrowing thus requires more to be borrowed at higher rates to service current debt. Many countries are near this spiral point - Britain I believe has been placed on -ve watch by one of the rating agencies. IT sort of becomes a self-fulfilling prophecy. Nervousness about a country's ability to repay debt means that less investors buy the debt, pushing up yields, making it more expensive to borrow, making it more likely that the country in question will default. Comprendez?

Makes sense to me. Ish.

HTH