European Austerity and the Fate of the Euro

May 01, 2012   |   May 2012 Bond Updates
Last week, S&P downgraded Spain to BBB+.  Spain, Italy, Greece, Portugal, Ireland, Belgium, Denmark, and Holland, members of the Eurozone, have officially fallen back into recession. We are more than two years into the European Debt Crisis – the crisis that we have been assured by politicians has been fixed, and, yet, much of the continent finds itself in the shadow of recession, banking crises, higher levels of unemployment, and, perhaps of most concern, higher debt to GDP ratios.  Although the “successful” long-term refinancing operations conducted by the European Central Bank (ECB) bought the markets about 4-5 months of breathing room, undercapitalized banks are now more closely tethered to the overleveraged balance sheets of their respective sovereigns.  After a temporary period of relative calm, 10-year borrowing rates in Spain and Italy have re-approached 6%.  Simple math dictates that, when you are growing at negative rates and borrowing at 6%, you are unlikely to improve your overall long-term debt dynamic.  It is truly a pathetic state of affairs when financial markets celebrate “successful” auctions of 12 and 18 month Spanish debt as if it is a mark of strong financial health – be advised, the bar has officially been lowered.  Unfortunately, lowering expectations does not fix the long-term debt issues facing the Eurozone, even if it makes financial markets feel better in the short-term. 

View more at: http://www.forbes.com/sites/robclarfeld/2012/04/30/european-austerity-and-the-fate-of-the-euro/
 
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