Hundreds of Billions of $ have been loaned by American institutions to European Countries. There is a very real concern as to the honouring of the debt. The U$D is in no safe situation as it stands with American debt mounting and American domestic liabilities nearing $100tn.
The EU is meeting with regards a way forward on their debt crisis. However the basic fact remains that the majority of debt is with more secure debtors that have reigned in their spending and are doing what is necessary for keeping exposure down.
What was the real crush involved rapidly reduced tax incomes for governments meeting higher social expenditure from the need to support increased unemployment coming the other way. In short the revenues were no longer able to support borrowing. They were too exposed. “They” being Portugal, Ireland, Italy, Greece and Spain. PIGS. Heavy social spending on welfare with a burden on the private sector was supported so long as there was a boom. Even a slow down wouldn’t have been safe for the likes of Greece. They were tsunamied by the crash.
Now they seeking to be bailed out by other European countries as their social consumption abuse spilled over into the common currency like toxic waste. They now need the bills to be met or they will hurt everyone else in the EuroZone.
Greece has been the worst and although many cuts have been made they are no where near close to what is needed. Their population is reluctant to take the hits required to make good on their past expenditure. Italy and Spain are a little better but heading the same direction. Tourism receipts (pivotal for Greece) are down from recession and going into the cold season they won’t start recovering until Easter 2012. Add to this Greece has had strikes that chased tourism receipts elsewhere. The good news is that they only have a small portion of the overall EU Debt. The bad news is that it will still hurt the Euro.
Germany and France are expected to bail out the PIGS but France is not that secure either as they had their own waste. Sarkosy did reign in the spending and waste when he got into power but what was spent remains spent. There is a limit to how they can help and the onus still sits with the PIGS countries to change their internal systems significantly to make any bailout last longer than a patch job.
Many of the European banks paid dearly for the USA melt down and that is swinging around to hurt American banks again. The trick has been to stop the cycle of losses but unless Greece and it’s sister PIGS can do what is necessary to increase productivity and cut their waste this is a challenge when the world economy is still in a depression. So long as the American economy continues down this will progressively worsen. As it stands it won’t be catastrophic, unfortunately 2013 will need to see an American turn around or these PIGS will be in the $P.00 and likely to be followed by France as they leave the economic plateau. There will be an international downward spiral that will involve all the world economies crashing following the fragile U$D.
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