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What's wrong in Europe?

Divine.Wind

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A good synopsis of the deteriorating economic situation in Europe. It also supports explaining why we continue to have our own problems because, like it or not, it's global economy.


Q&A: What's wrong in Europe? | Statesman Journal | statesmanjournal.com
Q&A: What's wrong
in Europe?

11:00 PM, Sep. 8, 2011|

Worries about Europe's debt crisis led to a
correction in U.S. stocks, a full-blown bear
market in some European markets, and
fears that European bank woes would
eventually haunt U.S. banks and money
funds. What caused the debt crisis, what
possible solutions are there, and how does
it affect U.S. investors?

Q: What caused the debt crisis?

A: The sudden realization that some
European Union countries may not be able
to pay their debts. Greece, the poster child
of the debt crisis, may need a second
bailout to pay its debtors. Few other of the
17 eurozone nations are enthusiastic about
a second bailout for Greece. Finland, for
example, may not contribute to the bailout
without pledges of collateral.

Q: That's it?

A: Not at all. Investors have also started to
fret about debt issued by Italy and Spain,
which are far larger economies than
Greece. "I think the eurozone could handle
the demise of Greece," says Ron Simpson,
managing director of global currency
analysis for Action Economics. Greece is
only about 2 percent of the eurozone
economy. Spain and Italy, however, are
another matter entirely.

Q: Anything else?

A: Sure. Eurozone countries still have to
pass laws to cut their deficits. Italy's
austerity plan, which will cut 20 billion
euros from its budget next year and 25
billion euros in 2013, would cut 50,000
jobs and raise taxes on high earners. The
spending cuts and tax increases are wildly
unpopular and have led to rioting.

More important, many European banks
own bonds issued by the least-
creditworthy eurozone countries. Should
those bonds default, or be marked down
substantially, banks would have to raise
additional capital to shield against losses.
Raising capital would give banks less
money to lend. And a major European
bank failure, a la Lehman Bros., could send
world markets tumbling. The stress tests
that European examiners conducted this
year didn't account for the possibility of a
country default. "The stress tests were
meaningless," says Nariman Behravesh,
chief economist for IHS, an international
consulting firm.
 

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