Europe's debt crisis won't end until Greece defaults
Once considered a small manageable problem, Europe's debt crisis has grown into a major international crisis. Europe will have to resolve the Greek problem that sparked the crisis.
Allowing deeply indebted European countries the chance to restructure their obligations seems to be the most direct approach to resolving the problem, yet has been met with resistance that likely will only prolong the crisis.Skip to next paragraph
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The reason: What once was thought to be a minor problem involving only some smaller peripheral nations in the European Union is now increasingly being recognized as a global train wreck about to happen.
"The problem in Europe is that the banking and national interests have been uncommonly incestuous over the years with banks in France owning the debts of companies in Spain and Spanish sovereign debt, while the banks in Spain own the debts of French companies and the French sovereign," Dennis Gartman, hedge fund manager and author of The Gartman Letter, wrote Friday. "In that environment, as one area of the economy contracts, others do also in a rush to liquidity and to the detriment of all."
Until recently, the popular narrative was that the debt burdens in smaller nations like Greece and Italy would be contained and not cause widespread contagion. That belief, though, has waned amid revelations that some European Union banks are having trouble raising capital. The ability to raise money would be critical in the event of defaults, as banks holding the restructured debt would have to recapitalize.
Suddenly, a problem that looked small and manageable now has much broader implications.
"We are finding out here that all economic activity requires a leap of faith and a sense of psychological assent that can shred at a moment’s notice, taking the cloth of society and tearing it asunder," Gartman said. "This is the perfect storm of a crisis of confidence and at the moment all confidence is lacking and waning."
Dual reports this week indicating that a European bank had borrowed $500 million from the European Central Bank, and that the Federal Reserve was looking into the stability of the EU financial system, helped shake confidence further.
The market already had been in the midst of a seven-week rout fueled by the stalemate in Washington over the debt ceiling and concerns that the US was heading back into recession.