We seem to be living in rather fragile times. There is too much going on in the world that can yet again derail the global economy. There’s the oil price and then there’s the Middle East turmoil. The Japan earthquake was a sorry addition to the list. And not to forget, the US economy is still not completely out of danger, trillions of dollars worth of injections not withstanding.
Clearly, the battle seems to be on as to what will really upset the applecart this time around. But what if we say the most likely candidate is not even in the list of events that we just discussed. It has somehow got pushed to the backburner.
But perhaps not anymore. Forbes adds that a severe escalation in Europe‘s credit crisis has the capacity to cause a repeat of the 2008 meltdown. Indeed, the chance that anyone or all of the so called PIIGS nations could default keeps rising by the day.
Not a week goes without something nasty taking place in any one of these nations. The latest issue to flare up has its roots in Portugal. Apparently, the parliament of the peripheral European nation recently voted against austerity measures of any kind. Not surprisingly, the ratings agencies swung into action and promptly downgraded the country’s sovereign debt ratings.
Other of the PIIGS may not be far behind. Already, Greece, Ireland and Portugal are commanding a heavy premium over the other two in the highly punitive Credit Default Swaps (CDS) market. CDS is nothing but an instrument that helps insure against defaults by corporate or sovereign bonds. Higher the premium, greater is the probability of a default.
Forbes adds that if Italian or Spanish CDSs start being grouped alongside Ireland and Portugal, it could signal a tipping point of sorts. This will then lead to a problem that will not be solvable by tossing another 100 billion Euros at the problem. And it will be not just sovereign bonds that will be on the line. It can have a huge impact on the European banking system. Not to forget the flight to safety attitude of investors that could spark a global sell off.
Thus, there you go. For the next few weeks, do not worry about the Japan tragedy much. Neither do fret about how high oil is headed next. Keep an eye on those troubled Euro nations. Particularly the risk premium they are commanding in the default market. And this would be the key to unlocking the mystery of the direction of the global economy.
- Sheldon Filger: Portugal Faces Severe Fiscal and Economic Crisis As Eurozone Sovereign Debt Fears Grow (huffingtonpost.com)
- The Complete And Definitive Guide To The Sovereign Debt Crisis (businessinsider.com)
- Europe Whispers “Crisis” While the Market Continues Screaming (businessinsider.com)
- Europe’s Sovereign Debt Crisis: Is Round Two Around the Corner? (dailyfinance.com)
- Can Jose Luis Rodriguez Zapatero save the euro? (curiouscapitalist.blogs.time.com)
- Marshall Auerback: We Aren’t Greece — But We Could Be Japan if Flawed Logic Persists (huffingtonpost.com)
- Stocks Fall, Dollar Index Rises After Portugal, Greece Are Cut (businessweek.com)
- The crisis temperature is also rising in Europe (theglobeandmail.com)
- Sovereign Ratings Add to Instability in Europe, IMF Paper Says (businessweek.com)
- Greece Leads Drop in Sovereign Bond Risk on Bailout Expansion (businessweek.com)