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Europe's debt crisis: Sitting on America's front porch?

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Mario Vedder/AP

(Read caption) A stock trader works at the Frankfurt Stock Exchange in Frankfurt am Main, Germany, on Monday, May 10.

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The financial crisis that began in housing, and then with banks and insurers, has now moved onto the balance sheets of nations. And, among the fiscally unsound, it’s the euro that is suffering the most. It recently hit a 14-month low in dollar terms, and the ongoing uncertainty facing the EU continues to break records for pessimism.

According to MarketWatch:

“In early February, the cost of insuring against a sovereign default in Western Europe exceeded the price of similar protection against default by North American investment-grade companies. That was the first time this had happened, according to data compiled by Markit from the credit derivatives market.

“The move ’symbolizes how credit risk has been transformed from corporate to sovereign risk, as the solution to the financial and economic crisis was government intervention,’ Hans Mikkelsen, credit strategist at Bank of America Merrill Lynch, wrote in a note to investors at the time.”

But it’s not just a European problem…

“Even though the current epicenter of the crisis is focused on the euro zone, the overall fiscal position of the single currency area is stronger than that of the U.S., the U.K. and Japan, he noted.

“‘Unless there is a radical change of course by those in charge of fiscal policy in the U.S., Japan and the U.K., these countries’ sovereigns too will, sooner (in the case of the U.K.) or later (in the case of Japan and the U.S.) be at risk of being tested by the markets,’ Buiter said.”

In response to these market pressures, Greece, and now Spain and Portugal, have begun austerity programs to rein in government spending and get deficits under control. As Daily Reckoning editorial director Eric Fry recently pointed out in the chart below, the US has similar debt funding requirements as the troubled EU countries… but has yet to start acting like the party’s over.

Visit MarketWatch to read more details on the second debt storm.

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