European Debt Crisis May Spread
ll the instruments to address the problems that may come either in the euro area or outside the euro area,” he told reporters in Brussels.
The Portuguese finance minister, Fernando Teixeira dos Santos, said Monday evening in Brussels that the situation in Ireland was creating dangers for all countries using the euro.
“If things are getting worse in Ireland, for instance, that will have a contagion impact on the other euro zone economies and particularly on those that are under closer scrutiny of markets, like Portugal,” he said. Asked if Ireland should accept a bailout to stem the contagion, Mr. Teixeira dos Santos said, “It’s not up to me to make that assessment.”
Even so, Mr. Teixeira dos Santos emphasized that his country was not preparing to ask for a rescue package.
Mr. Teixeira dos Santos also said his government was preparing a robust budget that would cut wages, freeze pensions and raise taxes. “We are really committed to meet our targets,” he said. “I think we deserve that the market gives us the chance to show that.”
The bureaucratic machinations in Brussels highlight one of the main concerns that grew out of the establishment earlier this year of a rescue fund of 500 billion euros (about $680 billion at today’s exchange rate) by the European Union after the Greek budget crisis: What happens if, in the next crisis, multiple countries need aid at the same time?
Months later, it remains unclear how, in practice, countries like Ireland and Portugal would tap the rescue money.
Of paramount concern to policy makers in Europe is Spain, which is struggling to close its own deficit of 9 percent of G.D.P. at a time when unemployment is more than 20 percent and the economy is failing to grow.
Just as the growing inability to get a precise reading on Ireland’s banking losses has propelled the Irish crisis, the extent of Spain’s own banking vulnerabilities — which, like Ireland’s, originate from a real estate boom and bust — remain unclear.
Until now, a series of austerity measures has allowed Spain to escape investor scrutiny. But late last week the spread, or risk premium, between Spanish and German bonds widened to a record high of 2.3 percentage points, underscoring investor fears.
Worries about the banks have peaked recently in light of data showing that distressed loans are now 5.6 percent of total Spanish bank loans — the highest level since 1996.
In Ireland, banking troubles lie at the root of what many in Europe are now calling a solvency crisis, reflecting long-term concern over Ireland’s ability to repay its debts, as opposed to the lack of short-term funds that forced the Greek rescue last spring.
“This policy of saving banks at the cost of breaking the back of entire countries is a disaster,” said Daniel Gros, director for the Center for European Policy Studies in Brussels. “Ireland is beyond fiscal plans as long as one cannot see the bottom of the losses in the banking sector,” he said. The only way to “stop the rot,” he added, “would be to let the Irish banks go under” and then use the European funds to “tide over the government until markets and the economy recover.”
Ireland is unlikely to let its banks fail, but it has been unable to accurately forecast its banking losses — or say whether bondholders will pay part of the bill.
Irish banking losses are estimated at up to 80 billion euros ($109 billion), depending on the forecast used, or 50 percent of the economy. As long as housing prices continue to fall, these losses cannot be capped.
Source
The Portuguese finance minister, Fernando Teixeira dos Santos, said Monday evening in Brussels that the situation in Ireland was creating dangers for all countries using the euro.
“If things are getting worse in Ireland, for instance, that will have a contagion impact on the other euro zone economies and particularly on those that are under closer scrutiny of markets, like Portugal,” he said. Asked if Ireland should accept a bailout to stem the contagion, Mr. Teixeira dos Santos said, “It’s not up to me to make that assessment.”
Even so, Mr. Teixeira dos Santos emphasized that his country was not preparing to ask for a rescue package.
Mr. Teixeira dos Santos also said his government was preparing a robust budget that would cut wages, freeze pensions and raise taxes. “We are really committed to meet our targets,” he said. “I think we deserve that the market gives us the chance to show that.”
The bureaucratic machinations in Brussels highlight one of the main concerns that grew out of the establishment earlier this year of a rescue fund of 500 billion euros (about $680 billion at today’s exchange rate) by the European Union after the Greek budget crisis: What happens if, in the next crisis, multiple countries need aid at the same time?
Months later, it remains unclear how, in practice, countries like Ireland and Portugal would tap the rescue money.
Of paramount concern to policy makers in Europe is Spain, which is struggling to close its own deficit of 9 percent of G.D.P. at a time when unemployment is more than 20 percent and the economy is failing to grow.
Just as the growing inability to get a precise reading on Ireland’s banking losses has propelled the Irish crisis, the extent of Spain’s own banking vulnerabilities — which, like Ireland’s, originate from a real estate boom and bust — remain unclear.
Until now, a series of austerity measures has allowed Spain to escape investor scrutiny. But late last week the spread, or risk premium, between Spanish and German bonds widened to a record high of 2.3 percentage points, underscoring investor fears.
Worries about the banks have peaked recently in light of data showing that distressed loans are now 5.6 percent of total Spanish bank loans — the highest level since 1996.
In Ireland, banking troubles lie at the root of what many in Europe are now calling a solvency crisis, reflecting long-term concern over Ireland’s ability to repay its debts, as opposed to the lack of short-term funds that forced the Greek rescue last spring.
“This policy of saving banks at the cost of breaking the back of entire countries is a disaster,” said Daniel Gros, director for the Center for European Policy Studies in Brussels. “Ireland is beyond fiscal plans as long as one cannot see the bottom of the losses in the banking sector,” he said. The only way to “stop the rot,” he added, “would be to let the Irish banks go under” and then use the European funds to “tide over the government until markets and the economy recover.”
Ireland is unlikely to let its banks fail, but it has been unable to accurately forecast its banking losses — or say whether bondholders will pay part of the bill.
Irish banking losses are estimated at up to 80 billion euros ($109 billion), depending on the forecast used, or 50 percent of the economy. As long as housing prices continue to fall, these losses cannot be capped.
Source
Tags: bonds, sovereign-debt
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© 2012 Created by Maulik Mody.
