European Debt Crisis Deepens, Crisis Spreads to More Countries


Article first published as European Debt Crisis Deepens, Spreads to More Countries on Blogcritics.

Ireland bailout worth 85 billion Euros could not convince the markets that the crisis would not spread to other indebted Eurozone countries. On Tuesday, debt costs of Portugal, Spain and Belgium have touched life time high levels in euro’s 12-year history. Late on Tuesday ratings agency placed Portugal on credit watch over its huge debts, signalling the next country to ask for joint aid from the EU and IMF would be Portugal as per BBC News.

Bond Yields

Portugal’s central bank warned about the risks being faced by its banks. Failure of the PortugalEurozone debt and bond prices - tn government in consolidating public finances may lead to Portugal banks to face intolerable risks, the central bank warns. France already came forward saying it will support to help Portugal and Spain if such a need arises. Financial officials in France and Germany accused investors for acting irrationally on the threat of financial contagion.

The yield on Spain’s 10-year bonds reached to 5.7% on Tuesday, a record difference of 3.05% compared with Germany’s 10-year bond. Bond spread for Italy’s 10-year bond was at 2.1 percent over Germany’s bonds and Irish bond yield stood at 9.53% while Portuguese bond yield stood at 7.05% for 10-year bonds. However, the yields for governments bonds of these countries are reportedly lowered on Wednesday on speculation that the European Central Bank would take extra measures to save Euro from falling, Reuters reported.

Germany’s Dilemma

Reuters quoted a Citi Group economist as telling that the Eurozone crisis could soon spread to the US and Japan. The officials of ECB, EU and EC are rushing to give statements to inject confidence among investors on Eurozone stability. Some analysts are expecting ECB to increase bond purchase programme from Eurozone region governments, while some of ECB officials are opposing such move. Germany’s Chancellor Angela Markel is one of such people, who are sceptical of providing further funds to indebted countries as that would force Germans to bear lion share of bailout programmes.

But, Germany is increasingly facing a dilemma situation whether to do more to save monetary union or to leave it to disintegrate. On the other hand, they are forgetting an important fact that decreasing labour costs would lead to decrease of purchasing capacity of the people, which is the basic factor for increase/decrease in consumer spending. Thus, the measures taken by the governments to increase productivity of the capital are ultimately leading to decrease in consumer spending that pushes down growth rate. This is the basic contradiction inherent in the capitalist productive system that forces unequal income distribution in the society.

Fresh Debts

It is learnt that Portugal and Spain are going to raise fresh debt from markets later this week. Portugal will auction government bonds worth 500 million euros on Wednesday and Spain on Thursday. S&P said that Portugal government had not done enough to boost labour flexibility and productivity, which means that Portuguese government did not decrease labour costs to help investments become more productive. There are several other ways to increase productivity of private investments but these capitalist investor choose only lessening wages because it is the only factor that would increase productivity exponentially comparing with the other factors.

Identical Conditions

The process for a country to tap European Financial Stability Facility (EFSF) has become almost identical to every country. Such situations are made easily predictable for investors and analysts, thanks to the rush of heads of states in condemning that their countries need no bailouts from outside. It is not that much clear whether markets are forcing the countries to tap EFSF or their financial worries are forcing them to do so.

For example, we can take Ireland. Ireland was forced by Spain and Portugal to claim for aid with fears that the contagion would spread to them. Though Ireland said it was funded fully up to the first half of next year, it was forced to tap the aid facility with fears of contagion. Nevertheless, Ireland bailout could not stop the contagion from spreading to other countries. Investors are demanding higher yields from bonds of Portugal, Spain, Belgium and Italy, even though Ireland was bailed out.

Greedy Finance Companies

If we remind that investors are not only individuals but also investment banks, other derivate funds and commercial financial institutions we may get a clue about this. These investors are out to cash in the critical financial situations of the most indebted Eurozone countries and pushing bond costs upwards. We may also remind that Greece government had repeatedly requested the US government to control Wall Street banks from betting on Greece debt. It means that, apart from actual financial situation of the indebted countries, profit motivated greedy financial firms are helping to advance the date of claiming for EFSF aid. If these financial firms stop betting on debts of indebted countries, definitely the situation will be different.

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