Sovereign debt issues may be hard sometimes for market diehards to swallow but they are bread and butter for currency speculators. Yesterday, having been simmering for weeks on the back of concerns over Greece, the Euro came under the serious cosh as a belief grew that sorting out the deficit and debt mess here would require rather more than promises received that the incumbent socialist government in Greece really had got the message. We may hope that is has though because with national debt representing 120% of GDP and a budget deficit 13% of GDP the current state of the Greek economy is clearly unacceptable. Certainly the manner in which the Euro was coshed yesterday suggests to me that even though the EU has endorsed the latest Greek budget plan aimed at slashing the deficit by 2013 most believe that this target will be all but impossible to achieve without a much stronger regime of EU discipline being imposed. Even so, having rallied early on in the day, it does now seem that the Euro has at least stabilised a touch Tuesday. The mood though remains sombre and for a while at least we suspect that currency markets will remain of the view that far more help will be required by Greece if the current and still ballooning budget deficit is finally to be sorted out.

Unsurprisingly with rating agencies using every opportunity to threaten further debt downgrading all markets be they currency, bond or equity remain nervous. They fretting is not just reserved for issues related to sovereign debt or government budget deficits of course but also on what little growth has yet returned to individual western economies or looks to be visible. Equally markets take an increasingly negative view that what little return to growth has appeared so far may not look that sustainable. Thus once again we have seen a natural flight to safety whatever that might be perceived on the day be it gold on one or the dollar the next. It is thus perfectly understandable that markets should look both left and right for further specific national examples of economic malaise and ambivalence or of where part or maybe all of the above issues may be concurrent. No surprise then that having latched on to the seemingly worsening state of affairs in Greece they would move on to other struggling Euro member economies including Spain and Portugal and that are both suffering severe economic weakness combined with one, other or both of budget deficit or debt concern. The faster they rise, the harder they fall so they say and true to say that amongst the more mature yet smaller western economies those of Spain, Portugal and Ireland have at least all been amongst the largest beneficiaries of Euro membership.

True also that despite the Spanish economy paying a severe price for over reliance on property and particularly speculative development in more recent years plus also of suffering high unemployment it is right to say that compared to some other euro member states and despite having risen sharply over the past two years neither Spanish budget deficit or its national debt is that much worse than average. Still, given the underlying economic weakness plus the all too few signs yet of anything that might lead to a period of sustainable growth markets have preferred to emphasise that the 2009 budget deficit in Spain represented 11.4% of GDP and that despite falling this deficit is still forecast to be 9.5% for 2010. Meanwhile national debt in Spain is forecast to reach 66% of GDP in 2010 – still significantly below the average 84% European Commission forecast for the euro zone area but given the underlying weakness of the Spanish economy nonetheless worrying.

Notwithstanding that Portugal has benefited hugely from Europe membership as a small peripheral member of the EU with little if any serious manufacturing the country is well used to having its debt downgraded. Portugal entered 2010 with national debt representing 76.6% of GDP – a figure that is forecast to rise to 85.4% of GDP in 2010. In terms of budget deficit which in EU terms is supposed to be a maximum of 3% the budget deficit was no less than 9.3% last year. This year the government anticipates the deficit falling to 8.3% although given that Portugal’s debt has been so severely downgraded one suspects that achieving this will be a challenge that is unlikely to be met.

What started weeks ago with visible worsening of the market attitudes to socialist Greece has in fact taken surprisingly a lot longer than one might have thought to spill over into potential other problem Euro area members such as Spain and Portugal. There are of course many other European worries for global markets to contemplate particularly amongst the group of new and also would-be EU member states in Eastern Europe. That said it isn’t only Euro member countries that suffer dual problems of budget deficit and national debt. The UK, the US and even Japan run with unsustainable levels of national debt and that have in the course of time adversely affected the value of their respective currencies. For example, despite the US having one of the largest global budget deficits of any western economy and being hugely reliant on countries such as China and Japan to mop up its debt yesterday we witnessed the Pound Sterling taking yet another sharp hit against the dollar. I am no currency expert of course but it is easy to see why the UK currency should be looked upon by speculators and the like as attractive to shorting. Sterling has of course tumbled on the back of the UK suffering what may also be regarded as a massive budget deficit and rising pile of national debt that is both unsustainable and in market eyes unacceptable. In November last year UK national debt was around £830bn a figure that represented just short of 62% GDP. Note here that following the huge effort that was put in under the premiership of John Major and continued for a few years by Gordon Brown during the prudent years national debt in 2002 stood at just 29% of GDP. However, it is also true to relate that today the situation in the UK is made all the worse if one chooses to add in potential liabilities that are generally ignored by the ONS figures – meaning that by adding in public sector pensions, state holdings of banks and the potential of liabilities, private finance initiatives, public private partnerships and the like it is possible to produce a national debt figure of £1.3trillion – a figure that would represent 103% of GDP. Worse is that with UK borrowing requirement still increasing and no attempt yet to halt the rise in the budget deficit. True, with an election looming in the UK it seems unlikely that either the rating agencies or markets will blow the whistle on the worrying level of UK debt just yet. However, it does mean that whoever wins must be on their guard and also face up to the likelihood of returning inflation, a corresponding rise in interest rates and thus a rise in the value of sterling that in turn may not be good for the economy.

For now though Greece remains the centre of market attention as the much troubled socialist nation struggles to find some kind of acceptable and workable formula to control its budget deficit. No doubt the worsening situation in Greece this week will be top of the EU leaders summit agenda Thursday and it may lead to some kind of rescue package alternative being launched by the EU.