Page 1 of 2
Europes debt crisis enters its third year with no
resolution in sight. Greece appears as likely to default now as
it did in May 2010, when euro zone countries and the
International Monetary Fund cobbled together an aid package
coupled with austerity measures to enable Athens
to meet its obligations.
Before that year ended Ireland became the first beneficiary
of the European Financial Stability Facility, a bailout fund
created in response to the Greek crisis and supported by the
so-called troika: the European Central Bank, the European Union
and the IMF. Last spring Portugal followed in Irelands
footsteps and was granted a reprieve, but by the summer fears
of contagion notably in Belgium, France, Italy and Spain
had become so pronounced that the EU asked contributing
countries to increase their commitments to the facility,
eventually raising the total amount pledged from
440 billion ($579 billion) to
The EU established the EFSF in part to restore investor
confidence. In December the ECB stepped up with a historic
infusion of cash also aimed at reassuring investors; it agreed
to lend more than 500 banks a total of 489 billion
for a period of three years at just 1 percent interest.
The difference between December 2011 and January 2012 is
striking, notes Simon Greenwell, who directs coverage of
Europe, the Middle East and Africa for BofA Merrill Lynch
Global Research. The large injection of liquidity
authorized by the ECB has materially increased the long-term
solvency of the EU banking system.
However, investors nerves were rattled anew last month
on Friday the 13th, no less when Standard &
Poors cut the credit ratings of nine European countries.
France was stripped of its cherished triple-A status, while
Cypriot and Portuguese bonds were downgraded to junk (putting
them on a level with Greeces, and fueling speculation
that a default by Portugal is all but inevitable). Italy and
Spain each was dropped two notches; Austria, Malta,
Slovakia and Slovenia were lowered one level
Three days after these downgrades, S&P cut the credit
rating of the bailout fund itself.
The risk of a sovereign default and the impact of
spending reductions taken to avoid this outcome dominated
investor sentiment in 2011, and this will extend into
2012, observes Richard Smith, Deutsche Banks
director of EMEA equity research. Politics will have a
crucial role to play over the next year.