Eurozone debt crisis
October 14, 2011
As the leaders of the G20 nations gathered in Paris Friday for a crucial summit, rating agency Standard & Poor's announced it had cut Spain's credit rating, sparking fears of a heavier burden for the eurozone bailout.
The summit, focused on how to save Greece from bankruptcy and prevent the eurozone debt crisis from spreading, comes as experts urgently warn that Europe's economic problems must be resolved quickly before the continent's banking sector comes crashing down.
Jean-Claude Juncker, the head of the eurozone group of finance ministers, emphasized Friday that this was not a crisis of the euro currency but a two-pronged problem of high debt and shaky banks that are holding the government bonds of debt-stressed countries like Greece, Spain, Portugal and even Belgium.
"Both problems are intertwined and both problems need to be solved. This is not a euro crisis - and I would like to make a point of that. This is a debt crisis of some members of the eurozone, and, a bank crisis, whose full scope we are not yet aware of. We need to deal with both crises," said Juncker.
Finance ministers and central bank governors representing the world‘s leading economies will attempt to deal with these two problems during their two-day meeting in Paris.
Fear of financial contagion
The G20 nations are concerned the eurozone's debt crisis could widen and engulf significant portions of the global economy, pushing the world into recession.
Wolfgang Gerke, director of the Bavarian Finance Center in Munich, criticized the world's political leaders for not learning anything from the last global financial crisis in 2008.
"For the most part, governments didn't learn anything. And they should be blamed for that. The last bank stress tests were like some sort of promotional campaign, and nothing was done to ensure that the European government bonds they held were booked at market value, which would have set off a stress signal," said Gerke.
"Instead, they acted as if government bonds were a perfectly safe title."
High stakes, low expectations
Despite the high stakes, G20 leaders have kept expectations low for their meeting. They have promised a plan by the end of the month, so this weekend is likely to be dominated by closed-door negotiations.
Two highly sensitive, and potentially explosive, issues are on the agenda: the recapitalization of ailing banks that hold risky debt, and finding a way to avoid a Greek default and lower the debt burden without forcing banks to write off more Greek debt than they can afford.
The problem has not become any easier after the S&P rating cut. The agency cited the country's persistently high unemployment, tightening credit and high private-sector debt as the reason behind its decision.
Portugal, at least, got a boost from Germany on Friday, as Berlin saluted Lisbon's fierce austerity drive.
"Portugal has embarked on a very difficult path of reforms and change to the structure of its economy," said a German government spokesman. The G20 is hoping other debt-ridden countries follow suit.
Author: Gregg Benzow (AFP, Reuters)
Editor: Martin Kuebler