Tax take hit as interest costs on bonds snowball
Published 20/01/2011 | 05:00
The rate at which interest payments on government bonds are eating up the tax European citizens pay is accelerating as investors wary of the deficit crisis drive up sovereign borrowing costs.
Greece, the first country to seek a bailout, uses a third of tax revenue to service the national debt.
"Too high interest costs tend to snowball and total debt then rises because of the payments," said David Watts, a strategist at debt-research firm CreditSights.
"In that sense, the bailout funds for Greece and Ireland are making their debt less rather than more sustainable."
Ireland pushed to reduce the average 5.8pc interest rate it is being charged by the EU for its bailout at a meeting of finance ministers in Brussels this week. The above-market rate was put in place under pressure from Germany to ensure aid was a last-ditch option for needy nations.
Ireland, which has to hand over almost 18pc of its tax revenue to bondholders, was forced to turn to the EU and IMF after the near-collapse of the banking system.
Concern is growing that Portugal, which pays 14pc of its tax take on interest, will need help.
Italy, which thanks to years of austerity and a high household savings rate, has so far avoided attracting the attention of bondholders, pays out more than 17pc of tax as interest.
The average for interest payments as a percentage of tax revenue of the 16 nations using the euro is 12.5pc, according to Eurostat. Average yields on government bonds in the region have risen 25pc in the past three months, according to Bank of America Merrill Lynch index data. (Bloomberg)