Tuesday, June 12, 2012

Europe Unprepared as Euro Crisis Deepens

by Stefan Kaiser


June 12, 2012

The weekend announcement that Spanish banks would be bailed out briefly drove up markets around the world. But optimism was short lived. The euro crisis is rapidly intensifying and Europe is not prepared.

The Asian markets are something of a canary in the coalmine when it comes to foreseeing how the day will unfold for European and US financial markets. And on Tuesday, that canary was looking woozy indeed.

After widespread investor optimism on Monday in the wake of the weekend news that Spain would receive up to €100 billion ($125 billion) in emergency aid for its wobbling banks, Tuesday has brought a return to realism. Black stock-exchange numbers have once again nudged back into the red and worries about the survival of the euro zone have returned despite the Spanish bailout.

The apparent skittishness isn't surprising. Greek voters go to the polls on Sunday in an election that many believe could determine whether the country remains in the euro zone or is forced out. Potentially more ominously, numbers released on Monday indicate that the Italian economy is in disastrous shape, having shrunk in the first quarter faster than it has in three years. It is the third quarter in a row that the Italian economy, the euro zone's third largest, has contracted. Many believe that it is merely a question of time before Italy also has to apply for emergency aid from the euro backstop funds.

Meanwhile, despite official optimism from Madrid -- and even from the oft-dour German Finance Minister Wolfgang Schäuble -- it is doubtful that €100 billion will be enough to save Spain's banking industry and put the euro zone back on the road to recovery. For one, recent history has shown just how quickly banks can run into significant trouble should the economic situation rapidly worsen.


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