Europe's Sovereign Debt Crisis: Is Round Two Around the Corner?

Recent reports suggest that the global recovery is faltering, raising concerns that we may soon see a replay of the sovereign debt crisis that rocked Europe -- and, eventually, the U.S. and the rest of the world -- earlier this year.

One driver for the upheaval that erupted last spring was the growing concern that countries in the region that had mismanaged their finances, most notably the "PIIGS" -- Portugal, Ireland, Italy, Greece, and Spain -- might feel compelled by deteriorating circumstances to restructure their debts, or renege on them altogether.

Those fears eventually spawned broader worries about the fiscal health of other nations in the eurozone, as well as banks with large holdings of PIIGS-related debt, and even the viability of the euro itself. Subsequent efforts to rebuild confidence, including government-sponsored bank "stress tests" and large injections of central bank liquidity, helped calm things down.

Now, though, economic data from the U.S. and China is pointing to a potential reversal of fortunes, and experts like Nobel Prize-winning economist Joseph Stiglitz are warning that Europe is at risk of falling into a double-dip recession. Together with rising public resistance to government austerity measures, the pressures could leave financially stretched nations in the region with nowhere to turn.

In fact, a quick read of recent trends in European credit and equity markets suggests that investors are beginning to anticipate another round of upheaval along the lines of what took place only a few short months ago.

This first chart, for example, shows that the value of credit default swaps -- which, loosely speaking, are a form of insurance against a debt default -- on the sovereign obligations of the various PIIGS has climbed sharply, and is above or near the extremes reached back in May.



Another chart reveals that the differences between the yields of bonds issued by those five European countries and that of Germany, widely viewed as having one of the best credits in the region, have also jumped, a clear sign that financial stress is increasing.




And finally, this last chart shows that Portuguese, Irish, Italian, Greek, and Spanish share prices have also come under pressure in recent weeks. Of course, stock markets elsewhere have not fared all that well either, but the weakness being seen here comes on top of the dramatic slides that these markets have experienced since the start of the global financial crisis in 2007.



In the end, of course, round two of the European sovereign debt crisis may well remain confined to the region. Better still, our markets could benefit from the perception that the U.S. remains a safe haven despite everything that has happened during the past few years. But if recent history is any guide, odds are that it won't be long before serious troubles over there start to cause big problems over here.

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thumpster6717

For perspective on this news, get the book AFTERSHOCK: PROTECT YOURSELF AND PROFIT IN THE NEXT GLOBAL FINANCIAL MELTDOWN by going to the web site: www.aftershockeconomy.com -- I got my copy for free by paying only for the shipping (about $4.95 US). Now that I have READ the above article (on which I am commenting) I am surprised that the European financial system is tanking first. The book indicates the US economy will fail first, dragging all the world's economies down with it. The authors' perspectives on this collapse is based on the theory of bubbles popping rather than of cycles in economies -- and that this time there will be no easy way to recover. Survival will be our focus for some time to come. Most of our investment money will go to money heaven (disappear into thin air). It is an easy read and a reality eye-opener, shocking if true. Credits: (c) 2010 David Wiedemer, Ph.D., Robert A. Wiedemer, Cindy Spitzer. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Phone numbers (US) associated with this: authors 703-787-0139, publisher 800-762-2974, Absolute Investment Management 301-907-6795. Disclaimer, I have association NEITHER with the authors, publisher, NOR the company mentioned here. I just think everyone needs to have a chance to read this book.

September 14 2010 at 9:30 PM Report abuse rate up rate down Reply
geo345

do some research, look at tax rates before 1980's. when you drop tax rate for wealthy and keep spending at higher rates you will go into debt. thats what happens when the 30 years are run by greedy rich politicians who only care about lining their pockets and their friends pockets with money.

September 01 2010 at 11:00 PM Report abuse +1 rate up rate down Reply
nymillionaire1

The majority of the people in the US couldnt understand this and if they could they wouldnt care. What do they care about? Lets see as of this minute: Zsa Zsa Gabor, Dr. Phil, Gloria Estefan, Tiger Woods...Oh wait at #5 is Mortgage Modification....I never saw that on "Trending Now" --- It's OK America get back to following LeBron James. I D I O T S

September 01 2010 at 8:32 AM Report abuse +1 rate up rate down Reply
National

And this report surprises who??? Throwing money even artificial fiat currency at a problem does not fix the problem. Socialism simply does not work and no one wants to give back thier plush handouts. And for those who want to look at the US which is sure to follow.... before you start pointing fingers.... the biggest issue after our yearly budget debt from a bloated and corrupt elite Gov't in Washington is the unfunded debt to support the entitlement society. Social Security and Medicare have a total unfunded liability of $140 Trillion which is about $400,000 per person. Can you say uh oh? Now ask.... Who passed Social Security ... the greatest Ponzi scheme ever perpetrated on mankind? Who passed Medicare? Who passed Obamacare? Who passed the Community reinvestment act requiring banks to make non-conforming loans to those that cannot afford it? Who passed the revisions to Glass Steagle in 1999....an act that had protected us since the depression? Who pased the regs allowing Social security to be taxed after they promised not to. Who passed rules allowing congress to tap into Social security for the General Fund? Who in 2006 declared there is no housing bubble and Fanny and Freddie are in great shape and any attmept to revise these GSE's (as proposed by Bush) were racist in nature? and on and on....Fact are a troublesome thing eh? The scariest thing is no one in Washington (the elite class who half these laws do not apply because they are special) will have the courage to address these issues. With all of the country feeling "entitled" to these social programs and 40% + recieiving handouts yet paying no taxes.... we will get what we deserve. And the first people to point fingers will be those getting the most handouts and those that actually supported these failed social experements. This gerneration it is sad to say is lazy, wants handouts, and wants to be taken care of by big Governement... no offense to those that stil have a strong work ethic and the values to take care of themsleves and thier families. Oh well... hang on to your shorts it is going to be a rough ride as I am certain no politician will have the courage to address the real issues. Far easier to blame someone else (awww, it's Bushes Fault)....than to actually do the job you wanted so badly and take responsibility for your own actions.

August 31 2010 at 4:09 AM Report abuse +9 rate up rate down Reply
2 replies to National's comment
ingfp

Good description of how things are and where we are headed. Slippery and dangerous ride even if we replace some of the corruptness in DC.

August 31 2010 at 7:50 AM Report abuse +7 rate up rate down Reply
chefdimock

hear/hear.

September 08 2010 at 11:03 AM Report abuse rate up rate down Reply
ultraz2

Term limits for a total of two four year terms for all US Senators and US Congressmen now. Sign the refenrendom to put it on the next presidential ballot. Lets get these dead beats out of their ,they are killing Americas way of life. Were mad as hell and were not going to take it any more.

August 30 2010 at 11:08 PM Report abuse +6 rate up rate down Reply
1 reply to ultraz2's comment
ingfp

I am mad too! 55 years old and have to put up with this incompetence at this stage of life is very disheartening and depressing. As a registered rep in the financial world and understanding economics pretty well its easy to see the writing on the wall. I don't like what I see written.

August 31 2010 at 7:55 AM Report abuse +2 rate up rate down Reply
ultraz2

No one has to spread fear just see the truth for what it is, the dumb ass free world politicians have killed their countries flock of golden geese. The middle class around the world is disappearing rapidly.Without the middle class to buy products the rich will finally fall.As an example a Ford Mustang shelby gt 500 kr had a sticker price of 130,000 dollars in 08,09 now you can buy them untitled ( as untitlled you will be the first owner )for 45,000 dollars, because their are few people with that kind of money. We need term limits and we need all government employees to pay social security, they need skin in the game as they decide social security benefits for the rest of us.

August 30 2010 at 11:03 PM Report abuse +3 rate up rate down Reply
rgkarasiewicz

You can be sure that if we now have the American media suggesting that the European countries are at risk of default, it'll take more than a plunger to salvage those countries' finances out of the toilet. I think that we're in for an unmitigated nightmare that nobody has bargained for.

August 30 2010 at 10:59 PM Report abuse +8 rate up rate down Reply
trk8554

Yep, keep on spreading fear and panic .......... doesn't it remind you a lot of what happened in the 30's on the other side of the pond!

August 30 2010 at 8:38 PM Report abuse -1 rate up rate down Reply
1 reply to trk8554's comment
ingfp

You have no Idea of what fear is if you are not skeptical of this phony.

August 30 2010 at 8:40 PM Report abuse +3 rate up rate down Reply
pjmducks6

I agree with David Stockman, head of Ronald Reagan's Council of Economic Advisors, that the Republican Party has destroyed the American economy. Thirty years of deficit spending (national debt in 1980 less than $1 Trillion, national debt in January 2009 (Obama inauguration) $11 Trillion). Americans just don't like paying their bills and so now we're bankrupt. Nobody can fix this without a lot of pain. Enjoy the pain Bozos, you voted for this for the past thirty years!

August 30 2010 at 7:27 PM Report abuse +3 rate up rate down Reply
2 replies to pjmducks6's comment
goody2bo

You nailed it! The time to fix today's problems was decades ago! Now it is too late. There is not much Obama or Bernanke can do. The die is cast for a depression. Buckle up, brace for impact. The crash will be the biggest ever. This is a deflationary crash. Current prices and salaries cannot be sustained with a deflating money supply. Debt levels are too high. We have borrowed for decades. Not just the government, but the people. When we borrow, banks create money. Credit has already been inflated for decades. It has reached it's limits. Economy cannot sustain the debt anymore. Credit is deflating: ****************** http://www.kondratieffwavecycle.com/credit-inflation/ ****************** Deflation is the reason why people go bankrupt. Foreclosures increase. Companies lay off employees. The money to pay existing debt does not exist. Thus, an entire population cannot expect to be employed at the old salary levels. Today's problems are not about what we are doing today. But they are about what we have already done for many decades. An entire nation cannot borrow for decades, inflate the money supply with borrowed money and then hope that all will be fine when the pay back time arrives. The cause is in place. The effect will follow. Deflation is coming. Kondratieff Winter has started: http://www.kondratieffwavecycle.com/kondratieff-wave/

August 30 2010 at 7:41 PM Report abuse +1 rate up rate down Reply
ingfp

To much Government! period! The only thing the Government should do is protect our rights. Anyone heard of Arizona? These clowns in the White House are a disgrace.....WOW this jackass on the side of MEXICO. You libs and DEMS quite a freak show!

August 30 2010 at 8:35 PM Report abuse +5 rate up rate down Reply
e2rgrundei

stop writing nonsense -- a little civility and patience might be in order.

August 30 2010 at 6:05 PM Report abuse +3 rate up rate down Reply
1 reply to e2rgrundei's comment
ingfp

Maybe mosqueobama has some PC issues like 90% of the small businesses that Obama is crushing. If you CHANGED our tax code and REPEALED the OBAMAMASTERCARE plan that helps NO one elected someone other than a well spoken half black dude (mostly teleprompter gifted)from NO FREAKIN WHERE other than corrupt Chicago maybe some civility would cross the lines of this insanity!

August 30 2010 at 8:30 PM Report abuse +1 rate up rate down Reply