Will Sovereign Debt Contagion Cross the Atlantic to the U.S.?
by Julian D.W. Phillips
May 17, 2010
Even after the massive rescue package [$750 billion] was delivered, confidence in the € seeped away and it weakened to $1.2320. With U.S. sovereign debt at unacceptable levels too, the debt fear ‘cThe package of new loans given to Greece seem to be more than enough to hold off the creditors until Greece has got its budget in order. But can Greece deliver the goods? When their turn comes, can Portugal, Spain, Italy and even the U.K. adjust their budgets to convince future creditors that can adjust their imbalances in time? Will they be able to repay any of this debt? Will they restore confidence in their Bonds in the market place? Countries cannot readjust their focus quickly. It usually involves a decades-long reshaping of a nation. Will the people support their government’s commitments? Let’s be frank, few believe they will. Remember all that debt to Africa in the last half of last century? It never was repaid and it took the banks 20 years to right it off their Balance Sheets. But this time we are talking of crises in the developed world. Who’s going to bail them out if these loans aren’t repaid? Many believe this is the beginning of the end for the €.
The U.S. has a chronic debt problem of its own and has not addressed these properly yet. Oh, yes it is the biggest economy on earth so one would expect all others to need it too much. Yes, it is too big to fail, or is it?
ontagion’ cross the Atlantic? More than that, if bond values continue to drop will the lending banks to the debts issued survive. Can this happen in the States and will their banks be dragged into the crisis?
President Obama himself gave alarming signals last week, with his encouragement of all parties to the rescue. Perhaps he thought his input would add a positive note of confidence to Europe? Why did he get so involved? Was it because of the fear that the U.S. would fall into the same situation?