The European Debt Bomb

 




Like the alliances that drew one country after another into World War I, a default by a single nation would send other countries tumbling. If that message was lost on anyone, there was a reminder last Tuesday when Standard & Poor’s downgrade of Spanish and Portuguese debt hammered stock markets everywhere, including in the United States.

The first domino is Greece. It owes nearly $10 billion to Portuguese banks, and withPortugal already falling two notches in S. & P.’s ratings and facing higher borrowing costs, a default by Greece would be a staggering blow. Portugal, in turn, owes $86 billion to banks in Spain; Spain’s debt was downgraded one notch last week.

The numbers quickly mount. Ireland is heavily indebted to Germany and Britain. The exposure of German banks to Spanish debt totals $238 billion, according to the Bank for International Settlements, while French banks hold another $220 billion. And Italy, whose finances are perennially shaky, is owed $31 billion by Spain and owes France$511 billion, or nearly 20 percent of the French gross domestic product.

“This is not a bailout of Greece,” said Eric Fine, who manages Van Eck G-175 Strategies, a hedge fund specializing in currencies and emerging market debt. “This is a bailout of the euro system.”


Interesting, that allusion to World War I. Very interesting.