A Closer Look at the Euro Crisis

On Wednesday the Euro dropped below 1.30, nearly reaching its 11 month low against the U.S. dollar. The stocks markets faced considerable selling pressure after Italy’s 10 year bond yield rose over 7%, a critically high level that elevates Italy’s borrowing costs.

Looking back in Time

Recent media coverage of the current Euro debt crisis has mainly focused on the present dangers and future risks in the Euro zone. However, there are many people who are still unaware of the root causes related to Europe’s sovereign debt crisis.

Since I enjoy studying history, I have compiled a brief list of some of the primary causes that led to the sovereign debt crisis in Europe.

This is a short list which is by no means comprehensive. It clearly does not cover all of the causes for Europe’s debt problems.

Contributing Causes of Europe’s Sovereign Debt Crisis

1) Globalization of financing, 2) soft credit conditions during 2002-2008 that encouraged risky lending and borrowing practices, 3) real estate bubble, 4) slow growth after 2008 (following the U.S. recession),  5) poor government fiscal policy decisions related to government revenues and expenses, 6) EU nations bailing out troubled banks and private bondholders.

Euro Zone Debt Owed in 2012

According to a Dec. 2nd article found at Bloomberg.com from John Glover that can be found here, EU banks will compete with their governments to borrow 2 trillion in 2012 as they refinance maturing bonds and bills. EU governments have to repay more than 1.1 trillion euros of long and short term debt in 2012 with about 519 billion euros of Italian, French, German debt maturing in the first half of the year.

European banks have 665 billion euros of debt that is due in the first 6 months with 370 billion euros by the end of the year, according to Citigroup based on Dealogic.

Italy alone must refinance 320 billion euros of bonds and bills in 2012 with 113 billion coming in the 1Q.

European Monetary Union

Tuesday morning on CNBC Kyle Bass, a managing partner at Hayman Capital Management, spoke about the risks that the European Monetary Union faces in the months ahead. Bass discussed the ongoing problems heavily indebted Euro zone countries face as a result of being unable to devalue their currencies since they are tied to the Euro.

Buyers of sovereign debt

Bass raised the issue about the lack of bond buying with some Euro zone countries and explained, “When you look at the periphery today there are no buyers for peripheral bonds other than the host countries’ banking systems that are basically the host countries’ sovereign banks. ”

Bass added, “That seems to me like what you would do at the end.”

Bass believes that central banks will “take the nuclear option” and print money but not until after debt defaults occur.

He is a euro skeptic who believes that the only way out for Europe is to break up.

You can read some of the excerpts from Bass’ interview here.

 

 

 

 

About Johnathan Schweitzer 1562 Articles
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