European Sovereign Debt Concerns

Interest rates have risen recently on the government debt of Italy and Spain.  As of the market close on Monday July 11, the 10-year government notes for Spain were yielding 5.9% while Italy's 10-year yield was 5.5%.  Compare these rates to the 10-year German bund rate of 2.8% at Monday's close.

When it comes to debt problems Greece has been the European country in the headlines.  We must understand that Greece is a relatively small country with a population of 11.2 million, a GDP of $318 billion and total public debt of $450 billion.  Greece is a real problem, but still we must recognize it represents only 2% of the European Union (EU) GDP.

Unintended Consequences

The Pension Protection Act of 2006 was designed to shore up our private pension system.  The law included a key provision, auto-enrollment, to encourage wider participation in company sponsored 401(k) plans. Under the law, companies are allowed to automatically enroll their employees in their retirement plan instead of having them sign up on their own.  We believe this was initially a good idea in a country where most aren’t saving enough towards their retirement.  Today, employers who offer auto-enrollment report participation rates above 85% compared to 67% for those plans without auto-enrollment, according to Aon Hewitt, a human resources consulting and outsourcing company. 

Zero Sum Game

The Greek Parliament passed legislation today that will allow the country to receive funds necessary for the country to avoid default on their existing debt.  The legislation is designed to enact certain austerity measures that were required by the European Union as part of the bailout deal that consists of another installment of the 110 billion euro loan.