On the edge of the abyss

Europe’s leaders must act fast to stop Greece’s market contagion spreading – Published on The Economist, April 28, 2010.

IF A sense of panic has started to grip Europe over the potential for Greece to default on its debts, and the contagion to spread rapidly to the continent’s other struggling economies, it has not yet struck Herman Van Rompuy, the president of the European Council. He insisted on Wednesday April 28th that there was “no question” of Greece’s debts being restructured. He also said leaders of the euro-zone countries would meet next month to consider how to activate their proposed joint lending programme with the IMF to support Greece. 

Jean-Claude Trichet, president of the European Central Bank, delivered an almost identical message, saying that a Greek default was “out of the question” …  //

… Fears that Greece’s fiscal crunch would spread to other euro-area countries have sent the region’s single currency reeling to a one-year low against the dollar. S&P’s decision on Tuesday also to downgrade the debt of Portugal by a couple of notches pushed European and world stockmarkets lower. Portugal, despite a smaller budget deficit and lower public debt than Greece, is widely touted as the next European country that may suffer a sovereign-debt crisis.

Portugal’s slow-growing economy, drastic loss of competitiveness and high public and private indebtedness are all weaknesses that markets might put to greater test.

If Portugal comes under intense pressure, contagion might then spread to Ireland, Italy or Spain, the other euro-area countries with some mixture of big budget deficits, poor growth prospects and high debts. Only swift and decisive action by the leaders of Europe’s big economies is likely to head off the current crisis. Default by a smaller member such as Greece would be a body blow to the euro’s standing but it need not spell the end of the currency. However, that might not be the case if the problems spread further afield. (full text).

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