How European Debt Fears May Spread

 

First it was Greece, then Ireland, followed by Portugal. These countries are suffering from severe debt loads (sound familiar?), are unable to pay the interest, and are potentially defaulting.

Greece recently agreed to a new five-year austerity program in order to receive more funds to repay its initial emergency loan. The country will have to cut spending and sell off government businesses in order to raise money, but it will be a difficult path and messy.

While Portugal is not a significant player in the European Union, weakness there could impact other countries, including neighbor Spain, which also needs to raise more capital. The problem is that Spain is a major global player, with its economy the ninth largest in the world.

But the trouble in the eurozone is far from over and may in fact just be beginning. In the worst-case scenario, it could spread like a wild fire across to other regions in Europe.

The yield required from debt instruments in Spain and Italy is on the rise, as fears mount that these two countries may also soon need financial relief. Italy just saw its debt cut. Unlike Greece, Ireland, and Portugal, my concern is that Spain and Italy are the third and fourth largest economies in the Eurozone and problems here could be devastating to not only the rest of Europe, but globally as well—in Asia and the United States.

Italy is facing problems dealing with its $1.4-trillion debt and may be the next European Union country to seek financial help, but Portugal may need a second round of financing. Portugal recently saw its debt cut to junk. This is clearly not a good situation in Europe.

My economic analysis in this situation is really straightforward. Without renewal in Europe and other foreign markets, we cannot expect a sustainable recovery.

The problem is that the big countries such as Germany and France are supporting the weaker members that cannot survive on their own at this time without capital infusion. This is not good and will hamper growth in Europe. The trillion-dollar austerity measures will take away from investing in the country’s growth and economic renewal.

I feel that Europe may continue to underperform the global markets in 2011 and 2012.

What is happening in Greece with the self-inflicted austerity program comes after years of debt mismanagement.

You just have to think about the debt situation in the U.S. and realize the similarities, albeit not to the same degree. With over $14.0 trillion in debt and rising deficits, there are concerns. President Obama wants to cut spending and reduce the debt, but some argue that the government needs to increase the debt ceiling or…

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