Europe Update: Crisis Deepens In The Peripherals23 May, 2011, 22:48. Posted by Zarathustra
Tags: Economy, Euro Crisis, Europe
In the last couple of days, S&P has warned about Italy’s situation, threatening a downgrade. Fitch has further downgraded Greece to B+ with negative outlook, and just now Fitch has turn the outlook of Belgium to negative. Spain, of course, had a local election on Sunday, in which the ruling Socialist Party were punished for implementing austerity measures.
In short, there is no shortage of bad news from Europe. The prices of credit default swaps, i.e. the costs of insuring the default risk of Portugal, Ireland, Greece and Spain, have surged. Now Euro is tanking, and European stocks are sinking as well.
Although there are more talks and rumblings that perhaps Greece cannot avoid any sort of restructuring (or reprofiling, whatever you would like to call it), the European Central Bank chief Jean-Claude Trichet is very much opposing the idea, and threaten that if Greece has to restructure its debts, ECB may stop accepting Greek bonds as collateral for any refinancing operations.
Niall Ferguson is quite gloomy about the European crisis right now. He noted an interesting precedent of a monetary union in the late 19th century, which died of slow death because of Italian deficits, such that he had an intellectual prejudice that eventually it will be Italy which will drive the Eurozone off the cliff. Of course, now it was Greece which started the whole mess.
He also noted the potential political problems for the countries in question. In short, more trouble for those parties in power, and more opportunities for the oppositions to propose some radical solutions, including the exit of Eurozone, which is probably the most dangerous idea right now.
At the same time as the Europeans are sorting out the mess, the International Monetary Fund is rushing to find a replacement for Dominique Strauss Kahn, with the French Finance Minister Christine Lagarde be the front-runner despite calls from the emerging economies for a fair representation of their interests.