Dancing around Europe's over leveraged quartet
Published:Friday | July 15, 2011 | 12:00 AM
Dennis Morrison, Columnist
Global financial markets were rumbling again last week and earlier this week as the threat of a Greek debt default continues with European financial authorities yet to agree on a second round of financial assistance for that country.
Adding to the unease were the downgrading of Irish government bonds by Moody's, and jitters in the Italian financial market and, of course, in the background are the continuing debt problems in Portugal and Spain. These all point to fears that the European financial system is suspect and confirm the failure of regulation of the system over the last decade.
Since the spring of 2010, nervousness about the debt problems of peripheral European countries euphemistically referred to as the PIGS - Portugal, Ireland, Greece, Spain - has been a source of instability in financial markets, thereby generating negative feedback effects on the major industrial economies. As I pointed out in a previous column, 'Shift in global fortunes as traditional growth poles shrink' published here on January 28, 2011: The globalised nature of the world's financial markets exposes countries to higher risks of contagion and, therefore, the problems in Europe could undermine overall world economic recovery.
It would appear that those risks have increased in spite of the massive European Union bailout fund set up last year to provide emergency support for member countries gripped by the fiscal and debt crisis.
Austerity measures being implemented by countries that have received assistance are likely to weaken their economies in the short term.
With their credit ratings deteriorating and borrowing costs rising, the problems could get much worse, unless access to substantial, additional official financing is provided.
This is what Ireland now faces with the downgrading of its government bonds and it is the basis of the second bailout package being negotiated for Greece, a population of just over 11 million, or about four times that of Jamaica.
Germany, Europe's strongest economy, has been the big contributor to bailout money provided by the European Union to Ireland, Greece and Portugal.
But there has been a raging debate and strong opposition in Germany to bailing out the Greeks and Irish, who are characterised as wasteful. This explains the earlier reluctance by German Chancellor Angela Merkel to the bailouts, and her insistence that creditors should absorb some of the costs of the debt crisis.
The irony, however, is that it is German and French banks that have been the major lenders and would, therefore, be the ones to bear the brunt of the losses. As a consequence, there has been disagreement about the approach to the on-going crisis that has slowed the decision making process.
Meetings to finalise the terms of the second Greek bailout package, and broader measures to deal with other problem cases, which should have been held this week have been postponed, adding to the uncertainty.
evidence of vulnerability
This has been cited as evidence of vulnerability of Europe's common currency and monetary authority as the EU cannot function effectively given the region's lack of central authority in fiscal and other economic matters.
The United States, despite having a federal system and centralised authority, appears nevertheless to be caught in a stalemate over its own fiscal and debt problems.
Uncertainty is growing about whether Congress will vote to raise the debt limit as Democrats and Republicans are far apart on spending cuts and tax measures required to achieve medium and long-term sustainability.
A sign of what a failure to reach agreement could mean is Moody's action in putting US debt on watch, warning that it would issue a downgrade if the political parties do not resolve the issues as the deadline for raising the debt limit approaches.
Were this to happen, the chaos in financial markets and the world economy that would ensue is something that most economists are not ready to contemplate.