European Debt Problems Continue to Fester
Stock markets around the world have been held hostage in recent months over the ongoing sovereign debt crisis in Europe, fearing that a disjointed European Union will fail to unite to stop the bleeding before a cascade of defaults and bankruptcies threaten to take down the entire world economic system.
The focus of this entire crisis has centered around Greece, where ballooning budget deficits have threatened to bankrupt the nation. As investors began to question the ability of the Greek government to pay off its obligations, interest rates skyrocketed, thereby burdening Greece with ever higher interest payments.
It soon became apparent that Greece was not going to be able to survive under the burdensome debt load. Even worse, the worries concerning Greece were spreading to other nations in southern Europe, especially in Italy where rising budge tensions eventually forced out their former prime minister, Silvio Berlusconi.
With fears of contagion quickly developing, the European Union has attempted to wall off Greece from the rest of Europe in the hopes of stopping a crisis before it spirals out of control. However, this has been much easier said than done. The more stable European nations, especially Germany and France, have been squabbling about the logistics of a bailout and the amount of money needed to properly fix the problem.
Although the European Union created the European Financial Stability Facility to address this problem, there are still fears among many economist and government leaders that the various European countries have not adequately funded it.
Much of the debate is spent trying to figure out how the pain will be distributed among the various interested parties. Countries like Germany want the debt-ridden countries to adopt tougher austerity measures in order to reduce budget deficits, but countries like Greece are reluctant to reduce spending at a time when their economy is have a difficult time recovering from a recession.
Alternatively, Greece wants their bondholders to take a bigger haircut, meaning they would get a smaller return than previously expected. Indeed, private bondholders, including many European banks, have already accepted a 50 percent haircut on their holdings. However, it remains to be determined whether it will be enough.
Stock markets around the world have been held hostage in recent months over the ongoing sovereign debt crisis in Europe, fearing that a disjointed European Union will fail to unite to stop the bleeding before a cascade of defaults and bankruptcies threaten to take down the entire world economic system.
The focus of this entire crisis has centered around Greece, where ballooning budget deficits have threatened to bankrupt the nation. As investors began to question the ability of the Greek government to pay off its obligations, interest rates skyrocketed, thereby burdening Greece with ever higher interest payments.
It soon became apparent that Greece was not going to be able to survive under the burdensome debt load. Even worse, the worries concerning Greece were spreading to other nations in southern Europe, especially in Italy where rising budge tensions eventually forced out their former prime minister, Silvio Berlusconi.
With fears of contagion quickly developing, the European Union has attempted to wall off Greece from the rest of Europe in the hopes of stopping a crisis before it spirals out of control. However, this has been much easier said than done. The more stable European nations, especially Germany and France, have been squabbling about the logistics of a bailout and the amount of money needed to properly fix the problem.
Although the European Union created the European Financial Stability Facility to address this problem, there are still fears among many economist and government leaders that the various European countries have not adequately funded it.
Much of the debate is spent trying to figure out how the pain will be distributed among the various interested parties. Countries like Germany want the debt-ridden countries to adopt tougher austerity measures in order to reduce budget deficits, but countries like Greece are reluctant to reduce spending at a time when their economy is have a difficult time recovering from a recession.
Alternatively, Greece wants their bondholders to take a bigger haircut, meaning they would get a smaller return than previously expected. Indeed, private bondholders, including many European banks, have already accepted a 50 percent haircut on their holdings. However, it remains to be determined whether it will be enough.
