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Sword of Damocles Hanging Over Europe

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New American
April 5, 2012

The sovereign debt crisis of the European Union is not going away anytime soon. The new Italian government has already had a crisis of confidence and a threatened general strike that has pushed the yield on Italian government bonds higher and led the new premier to ponder resignation.

Europe’s financial affairs administrator, Olli Rehn (left), the European Commissioner for Economic and Financial Affairs, has recently warned that Portugal may need a bailout within a year. Rehn has tried to deflect calls from the President of the German Bundebank for an “exit strategy.” In Greece, which is in even worse shape that the other “PIIGS,” a man shot himself outside the Greek Parliament on account of his debts which seemed insurmountable. His suicide note likened the current Greek government to the collaborationist government under the Nazis.

Enda Kenny, the Prime Minister of Ireland, has very publicly stated that his government will not default on its debts, saying at his party’s conference: “Ireland will not default. But we are determined to ease this burden on our people. That’s why we are negotiating with our Troika partners [the EU, International Monetary Fund, and European Central Bank] to find a cheaper way of financing the cost of bank recapitalization.”

So it ought to come as no surprise to learn that Spain is still in trouble. On April 3 the Spanish stock market dropped a chilling 2.6 percent in a single day. One consequence of this collapse is that the European stock market also dropped, declining 2.1 percent to close at its lowest price in a month. Koen De Leus, a financial strategist at KBC Securities, said:

We had a strong rise this year already, and now markets are concerned that what is happening in Spain will spread to other countries. Austerity measures have already been taken in Belgium, Holland and Italy, and European economies won’t grow. There will be a recession in Europe and markets will react to that. In this quarter and the second half of the year, it will be much harder for markets to rise strongly.

Spain’s bond auction reflects the nervousness of investors. The nation’s borrowing costs jumped in the first auction since the government announced its budget. Annalisa Piazza, a financial strategist for Newedge, tried to put the best possible face on the sale: “Market dealers seem to look at fundamentals now, with risks of a deep recession undermining the positive effects of the large ECB liquidity injection that led to a massive spread tightening since early this year.” The rising rates which the Spanish government must pay bond investors to buy its sovereign debt, however, will increase the budgetary problems for Spain.

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This article was posted: Thursday, April 5, 2012 at 2:09 am

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