Euro Debt: No End in Sight

Aug. 18, 2011 - PRLog -- Investors are pushing the panic button as the European debt crisis spins out of control. Banks around the world are trying to calm their clients' fears, setting up special conference calls and one-on-one sessions, but there seems to be nothing they can do at this point to prevent a rush for the exits. Italy, long considered too big to fail, now looms as the Continent’s biggest possible failure. Germany's role in stabilizing the teetering euro faces increasing criticism from within the country's political circles. While analysts acknowledge that the problem is severe, they also believe that there could be a way out of this mess, with some calling for a massive European bailout mechanism, similar to the one set up in the U.S. at the height of the financial crisis. Most agree that European governments need to act collectively and in short order, before this contagion causes irreparable damage to the economic fabric of the continent.

On May 9, Standard & Poor's downgraded Greece's credit rating to "B". On May 16, the European Union (EU) and the International Monetary Fund (IMF) announced 78 billion euros to Portugal as emergency assistance. On June 13, Standard & Poor's further downgraded Greece's credit rating to "CCC", and will continue to maintain a negative outlook. This is the lowest sovereign credit rating Standard & Poor's gives. The reappearance of the European sovereign debt crisis has shocked vulnerable financial markets worldwide, and oil prices and commodity prices fell accordingly. The euro weakened against the dollar after Irish debt was downgraded to junk by Moody’s Investors Service and yields surged in Italy, drawing the euro zone’s largest debtor further into the region’s financial crisis. The euro fell 0.8 percent to $1.4157 in New York, from $1.4265 on July 8, its second straight weekly decline. The yen strengthened 2.6 percent against the euro to 112.02, the biggest five-day gain since May 6. The dollar weakened 1.9 percent to 79.13 yen from 80.64.

The European debt crisis continues to escalate even after the introduction of the largest rescue package in history, worth 750 billion euros. This amount of money is enough to cover all the matured debt in 2010 and 2011 of the five countries with low credit ratings in Europe: Portugal, Italy, Ireland, Greece and Spain. The most important reason for the financial crisis is probably because the market believes the emergency loans the EU and IMF provided is not a good way to help those countries to move forward. Loans may only postpone the crisis. The biggest problem for the five countries is they have borrowed a lot from the financial market when their national competitiveness is declining. With the emergency loans, the crisis-laden countries can only repay old debts with new debts. The loans do not bring down the scale of the total debts, but simply extend the repayment date. If the five countries do not increase their solvency, then as the new debt matures, the crisis will be revived. The debt crisis will not end soon. This battle may last three to four years or even longer, with the possibility of periodic outbreaks. If this is not addressed properly, the debt crisis could negatively impact European monetary integration and the prospect of euro.

# # #

About Provideo Financial:
Provideo Financial is a family oriented firm that operates on a set of sound financial strategies designed to maximize our client's investment opportunities.