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| AEI's Desmond Lachman provides continued analysis on the growing sovereign debt crisis in Europe that has plagued countries such as Ireland, Portugal, Greece and Italy. He writes that, "This crisis has the potential to deliver a major blow to the European banking system, which is the main holder of the European periphery's US $2 trillion in sovereign debt obligations." A Greek or Irish sovereign debt restructuring would constitute the largest such restructuring in history. The crisis has brought to question the partnerships between European countries. He writes that since it started, there have been ever-growing signs of strain in the rocky marriage between Europe's peripheral countries and those at its core. This leaves the future of the Euro uncertain. A banking crisis in Europe, along with a renewed economic downturn will "have serious implications for the global economic recovery," he writes. Furthermore, the crisis will lead to the weakening of the euro and put US exporters at a competitive disadvantage. Three factors make it likely that Greece, Ireland and Portugal will choose to default before the establishment of the European Stability Mechanism in 2013: -
First, deepening domestic economic recessions caused by International Monetary Fund-imposed austerity will make it increasingly untenable for governments in the periphery to stay the austerity course, especially when the reason for such domestic belt-tightening is politically perceived to be to generate resources to repay foreign banks. -
Second, unlike in the emerging market countries, around 90 per cent of the periphery’s external debt to private creditors is covered by domestic rather than by American or British law. This makes such debt amenable to debt restructuring by a change in domestic law, which the domestic courts would be obliged to enforce to the detriment of foreign private creditors. -
Third, delaying debt restructuring makes it very much more difficult for the peripheral countries to restructure their debt since over time the periphery’s debt to private creditors, which is more easily susceptible to restructuring, is progressively being converted into multilateral debt, which is very much more difficult to restructure. Read more about the European debt crisis from Desmond Lachman.
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