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Fears of 'Lehman-style' tsunami as crisis hits Spain and Portugal
Ambrose Evans-Pritchard, The Telegraph
Julian Callow from Barclays Capital said the EU may to need to invoke emergency treaty powers under Article 122 to halt the contagion, issuing an EU guarantee for Greek debt. “If not contained, this could result in a `Lehman-style’ tsunami spreading across much of the EU.”

Credit default swaps (CDS) measuring bankruptcy risk on Portuguese debt surged 28 basis points on Thursday to a record 222 on reports that Jose Socrates was about to resign as prime minister after failing to secure enough votes in parliament to carry out austerity measures.

Parliament minister Jorge Lacao said the political dispute has raised fears that the country is no longer governable. “What is at stake is the credibility of the Portuguese state,” he said.

Portugal has been in political crisis since the Maoist-Trotskyist Bloco won 10pc of the vote last year. This is rapidly turning into a market crisis as well as investors digest a revised budget deficit of 9.3pc of GDP for 2009, much higher than thought. A €500m debt auction failed on Wednesday. The yield spread on 10-year Portuguese bonds has risen to 155 basis points over German bunds.

Daniel Gross from the Centre for European Policy Studies said Portgual and Greece need to cut consumption by 10pc to clean house, but such draconian measures risk street protests. “This is what is making the markets so nervous,” he said.

In Spain, default insurance surged 16 basis points after Nobel economist Paul Krugman said that “the biggest trouble spot isn’t Greece, it’s Spain”. He blamed EMU’s one-size-fits-all monetary system, which has left the country with no defence against an adverse shock. The Madrid’s IBEX index fell 6pc...
(4 Feb 2010)

G7 tries to ease fears over Greek contagion
Anna Fifield, Financial Times
Global economic leaders sought to reassure markets that the debt contagion spreading across southern Europe was under control, expressing confidence that Greece could bring down its debt levels without outside intervention.

At the end of a Group of Seven finance ministers’ meeting in Canada, they also made the case for continued economic stimulus for their economies, adding that the global recovery remained fragile.

“We are all agreed that continued stimulus is necessary,” Jim Flaherty, Canada’s finance minister and host, said after the weekend meeting. “There is a concern about deficit levels and, when stimulus ends, how we exit,” he said.

The unfolding debt drama in Greece, which is now spreading to Spain and Portugal, was among the top agenda items, as Athens struggles to persuade investors it can bring down its public deficit – 12.7 per cent of gross domestic product – without outside assistance.

“I’m confident they can manage this, and manage it well,” Tim Geithner, the US Treasury secretary, told the Financial Times after the meeting...
(7 Feb 2010)

Europe On The Brink
Greg Peel, ninemsn
To recap, the European Union is comprised of 27 sovereign nations in a common trading bloc, the purpose of which is to compete as a collective more effectively with the world's economic powerhouses of the US, Japan and now China. It was born of the old "Common Market".

Of those 27 nations, 16 have chosen to also band together under a common currency - the euro. Responsibility for the euro falls to the European Central Bank, and "euro-zone" membership comes with the requirement to satisfy various economic criteria in exchange for central bank protection (such as lender of the last resort insurance). One of those criteria is that members must maintain a level of public sector deficit of no more than 3% of GDP. In order to finance deficits, individual members issue their own soveriegn bonds. There is no single euro-zone bond. Excessive debt issuance from one member state incrementally impacts on each member state via the devaluation of their common currency.

Any sovereign nation can also go cap in hand to the International Monetary Fund for financial assistance, as that is what the IMF is there for. But the IMF also imposes strict criteria itself when it bails out an economy, and one of those is a forced devaluation of that nations' currency. In the case of euro-zone members, clearly this is not an option. Thus the ECB must respond first.

In 2009, the ECB was forced to bail out euro-zone member Ireland.

One of the euro-zone's biggest problems is economic disparity. The CIA World Factbook (yes, the US charges the spooks with the task of measuring everyone's economy) puts the European Union's total GDP in 2009 down as US$16.0 trillion, ahead of the US on US$14.2 trillion. China's economy is now assumed to have exceeded that of Japan's but for the sake of comparison, the CIA suggests Japan's GDP was US$5.0trn in 2009 and China's US$4.7trn...
(4 Feb 2010)