Global Biz

Europe debt crisis stirs recession fear

(Agencies)
Updated: 2010-05-22 11:26

Fears spread for a similar scenario in other countries like Spain and Portugal, and that shattered confidence in the euro, which has in recent months lost some 20 percent of its value.

A bailout seemed necessary -- but eurozone leaders struggled to agree, with opposition especially strong in Germany, where the idea of paying for the profligacy of Greeks and other partners is extremely unpopular.

As Europe dithered Greece faced skyrocketing borrowing rates driven by fear of default and ultimately was shut out of bond markets. Eurozone governments -- with an assist from the International Monetary Fund -- eventually produced a euro110 billion bailout for Greece, followed two weeks ago by a euro750 billion backstop for other shaky governments.

The huge injection was surprising and impressive and seemed to halt the slide, at least temporarily. But while the sum might not be too little, it could still have come too late. Talk that would have been taboo a few years ago, of the eurozone breaking up, is starting to spread.

And even if it is only talk for now, such words can have ripple effects around the world.

World markets have always affected each other, but instant and constant connectivity and real-time trading and instant information have taken things to a new level; bad news in Milan can trigger instant selloffs in Tokyo or Chicago.

In China, the world's top exporter and the biggest economic engine in Asia, there is renewed fear that a slowing in exports could reverberate through the economy, squeezing manufacturers already grappling with rising costs and narrow margins, Commerce Minister Chen Daming warned this week.

A sell-off in the stock market this week signaled, among other things, a belief that the economy is headed for a slowdown later this year, after having expanded by nearly 12 percent in the first quarter from the same quarter the year before.

Guillen noted that as the euro sinks against the dollar, it also falls against Asian currencies linked to the dollar such as China's yuan, also called the renminbi. That makes it tougher on China's exporters.

The Fed's Tarullo said the direct effect on US banks of losses on exposure to overextended governments in Greece, Portugal, Spain, Ireland and Italy "would be small." But if problems were to spread more broadly through Europe, US banks would face larger losses as the value of traded assets dropped and loan delinquencies mounted.

US money market mutual funds, which are major suppliers of short-term cash to European banks through their holdings of commercial paper, would likely also be affected, Tarullo said.

Neil Mackinnon, global macro strategist at VTB Capital in London, said it would be a mistake to think the problems on Europe's periphery represented only a local crisis.

"The problems in the eurozone debt markets, which many people thought was a regional problem, has morphed into a major global problem," Mackinnon said.

Germany's embattled Chancellor Angela Merkel, whose government is widely blamed for the dithering that so amplified the collapse of confidence, suggested this week that she understood the heavy stakes.

"The euro is in danger," she told lawmakers, urging them to approve Germany's portion of the wider bailout plan. "If we do not avert this danger, then the consequences for Europe are incalculable, and then the consequences beyond Europe are incalculable."

The lawmakers did as she asked.