Fri, Jun 15, 2012, 6:42 PM EDT - U.S. Markets closed

'A Cheat Sheet' on the Europe Crisis

The European economic crisis has been three years in the making, and its outcome is uncertain.

Crushed by debt and distressed banks, countries like Greece, Spain, and Ireland face ongoing recessions, while Germany and the Netherlands along with members of the International Monetary Fund , push for austerity measures.

There's more than enough reason for concern. The economy of the European Union, which holds the 17 nations that use the euro currency and 10 others, is a larger economic bloc than the United States or China.

To help clarify the situation, here's a look at what's happening now, with updates as they happen, and a look at the major players.

Week of June 11:

Spain's credit rating took another hit on Wednesday. It was downgraded by rating agency Egan-Jones "CCC+" from "B." This is mainly due to Spain getting a bailout for its banks indicating a need for more money to run the country. The downgrade Spain's borrowing costs will go up.

Greeks are withdrawing cash out of banks to the tune of some $1 billion so far, and stocking up with food ahead of a cliffhanger election on Sunday that many fear will result in the country being forced out of the euro.

The last published opinion polls showed the conservative New Democracy party, which backs the 130 billion euro ($160 billion) bailout that is keeping Greece afloat, running neck and neck with the leftist Syriza party, which wants to cancel the rescue deal. (see more on Greece below).

Euro zone finance ministers agreed on Saturday (June 9) to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks; Madrid said it would specify precisely how much it needs once independent audits report in just over a week.

Italy is also back in the headlines (see below for more on Italy) as a result of the loan to Spain, over fears the Spanish bailout won't stop the crisis from hitting Italy's already staggering economy.

Because Italy does not have enough economic growth to generate money, the government will probably have to borrow it at high interest rates, adding to an already heavy debt load.

Week of June 4:

The European Commission on June 6 proposed far-reaching powers for regulators to deal with failing banks, a step toward the banking union the European Central Bank and others are pushing for to secure the euro's future.

But the legislation is unlikely to take effect before 2015, far too late for Spain, which could be forced to seek a bailout for its banks if it cannot refinance the lenders, which are saddled with bad property loans and other non-performing debt.

Finance ministers and central bank governors from the Group of Seven economies agreed on June 5 to coordinate responses to the crisis as Greece contemplates leaving the euro. The group includes Germany, Japan, Britain, the United States, Italy, Canada and France.

Europe's leaders have been discussing several proposals including formation of a eurobond and creation of a banking union that would put central authority behind the continents banking sector.

The Major Players

Germany:

As of June 5, Germany indicated it was prepared to accept a 'deal' that would provide greater support for the most indebted euro zone partners in exchange for more centralized control over government spending in Europe.

This is important because Germany has the strongest economy in Europe, and the fourth largest in the world, and plays a leading role in the crisis under Chancellor Angela Merkel-whom many consider the de facto leader of the European Union.

Germany's leadership is said to be 'vital to salvaging the euro as a single currency and stopping a debt crisis that's rattled markets and threatened the global economy.'

Others say Germany has gone way too far in imposing austerity measures on countries like Greece and Ireland.

Criticism of Germany's handling of the debt crisis goes back to 2010, with some analysts blaming the German government for not stepping in soon enough with aid to stop the Greek crisis.

But Germany has been the biggest contributor in terms of money for bailouts and that has caused some controversy with some Germans-saying they have given enough money to help their fellow Europeans.

Greece:

Greece has its third government in less than a year and fourth one could be coming in mid-June with elections. Polls show that Syriza, the left leaning anti-bailout party, is gaining in popularity.

Greece got where it is by racking up billions of dollars in debt that it couldn't repay without some sort of help. In February of 2012, the European Central Bank , the European Commission, and the IMF agreed to renegotiate Greece's debts with lenders and give Greece a $170 billion bailout.

In return, Greece agreed to shrink its deficit with a series of spending cuts and tax hikes. This was the second bailout for Greece in as many years.

But Greece suffers from high unemployment and an economic slowdown-Greece's economy is expected to shrink by 6 percent this year-and many of its political leaders as well as the population say the austerity measures are too severe.

There's talk of the country dropping the euro as its currency. Analysts say that Greece could lose 50 percent of its economic output in the first year alone if it dropped the euro. It would also damage the balance sheets of Greek banks and firms as investors and savers would likely withdraw funds in anticipation of a euro exit.

Spain:

In the early 2000s, Spain's economy was considered sound. But a housing bubble developed and the economy took a hit when that bubble burst in 2007.

That created a crisis for Spanish banks holding mortgages and loans it gave out to developers. In late May, Spain's fourth-largest bank, Bankia, announced that it needed $23.5 billion in aid. Spain ended up nationalizing Bankia.

Spain's economy has slowed, its debt has increased, and unemployment has soared to 25 percent.

Recent reports say that Germany was pushing Madrid to accept funds from the European Financial Stability Fund to recapitalize its banks. That push may have worked as noted above.

The current Spanish government had said it was determined to solve its crisis without 'foreign' aid, but that changed with a bailout of euro zone countries for its banks.

Spain has proposed selling Spanish bonds to be used as collateral for paying down its debt.

Many Spanish residents have protested in the streets over the last year because of austerity measures imposed by Madrid.

Ireland:

Ireland was the first European country to go into recession in 2008. Like Spain, this was mainly due to the bursting of a housing bubble.

The government then had to back up its own banks with funds as well as foreign banks that had major investments in the country.

The government took control of the Anglo-Irish Bank in December 2008. Downgrades of Ireland's credit ratings in 2009 and 2010 made borrowing more expensive.

In late 2011, Ireland received $113 billion in bailout funds from the EU and International Monetary Fund. But the trade-off was severe austerity measures-cuts in social spending and tax increases-that has kept the country in recession.

Ireland's unemployment rate hovers around 14.3 percent. Research firm Davy has significantly cut its 2012 GDP forecast for Ireland to 0.4 percent from a previous number of 1.7 percent.

Italy:

As we noted above, concerns are growing that Italy could be the next victim of Europe's financial infection, leading nervous investors to sell Italian stocks and bonds and damping euphoria over the deal to bail out Spain's banks.

Italy's debt problem-it does have a high debt ratio to GDP-isn't related directly to any kind of housing bubble, banking crisis or wild government spending but more toward the fact that the country's economy is at a standstill.

Italy's is the third-largest economy in the European Union, but its GDP growth has slowed dramatically since the early 2000s.

It plunged below zero during the global recession of 2008 and has barely recovered. Unemployment remains high-at 10.2 percent in April of 2012.

As a result, investors are concerned about the country's ability going forward to cover its debt interest payments without incurring ever-higher levels of debt.

Those fears, paired with jitteriness over euro zone neighbors like Greece, have forced Italy to pay more and more for credit.

Italy's government led by prime minister Mario Monti has promised a new economic policy of balancing the budget, promoting growth, and cutting down on social disparities. That includes overhauling Italy's pension system, fighting tax evasion and cracking down on organized crime.

Portugal:

Like Spain and Ireland, Portugal has more private debt than public debt. But like Italy, it's economy has been shrinking and that's been the main cause of concern. The Portuguese government projected that the country's economy would contract by 3.3 percent in 2012. It has an unemployment rate of 13 percent.

Portugal's public debt was downgraded in July 2011. But much of the borrowing by Portuguese companies has been financed by Spanish banks.

That creates the possibility-and increased worries-of a domino effect, where a financial squeeze in Portugal leads to a bigger crunch in the Spanish banking sector.

In April 2011, Portugal got a financial bailout from the European Union worth $115 billion that imposed economic cutbacks to hold down its debt.

Other Countries:

Great Britain and France have both gone through their share of economic woes but are not considered in any immediate danger of defaulting on loans.

France's credit rating was downgraded in January of 2012 and faces higher borrowing costs as a result. It will also affect the euro zone bail-out fund, which is at the heart of efforts to ease fears about the currency bloc, as France is partly responsible for underwriting it.

As for Great Britain, it's facing another recession, according to analysts, and higher unemployment-up to three million more people are expected to lose their jobs in England during 2012.

The United States and China:

Mostly an observer, America's main concern is that Europe's problems could help slow down the U.S. economy even more than it is now-as it struggles from its own recessionary problems.

Higher unemployment and less consumer spending in Europe could hurt American companies who depend on foreign sales to boost their bottom line and keep workers at their jobs.

But only about 13 percent of U.S. exports go to Europe, and some analysts say slower growth in Europe would put a relatively small dent in the U.S. economy.

The Obama administration has talked with its European counterparts about the crisis but so far, the U.S. has done little about it.

As for China, it has expressed concern about the crisis but it, too, has offered little in the way of bailout funds.



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40 comments

  • Vote Against Obama 2012  •  2 days 5 hours ago
    As much as Greeks are begging for a handout - they are pulling money out of their banks as fast as they can - that should tell you all you need to know: don't give the Greeks another dime!
    • john 2 days 2 hours ago
      They realize Euros have value and if they drop out of the zone and move back to their own currency, it won't.

      Back in the 1980's I worked on a cash register system for a food vendor and we had to do special code for Italy because two cheeseburgers, fry and a soda cost in excess of 10,000 Lira. Greece will be in the same boat without the Euro so they need to save them now.
  • Graham  •  Canberra, Australia  •  2 days 5 hours ago
    In having a currency union (without a political union) Europe put the cart before the horse. With Spain joining Greece, Portugal and Ireland on life support, a common currency prevents FOREX markets from putting a price on national folly. The Euro is dying.
  • E  •  18 hours ago
    Bailouts in Greece just run up the debt and exasperate the problem, same as they do here. They are just a money laundering scheme. the money is printed, borrowed, added to the debt, and used to keep government union employees from getting laid off or lose benefits. The unions then funnel money back to the government officials and political party to keep them in power, while needing more bailouts because the private sector can't possibly pay for it.
    That's where the bailout money in Greece goes, and that's where the bailouts went in the US.
  • govparasite  •  2 days 4 hours ago
    It apperas the euro-socialist economic house of cards is crashing in...very soon...
    • j 2 days 3 hours ago
      The global bankers deregulated dream.
  • Michael  •  2 days 3 hours ago
    It's truely amazing to watch the selfish, lazy, human nature try everything but what is neccessary to solve this spending problem.
  • Smartypants  •  Dearborn, Michigan  •  2 days 4 hours ago
    The operative word here is banks. Why do Irish taxpayers have to stand behind "their" banks? That should be a surprise to any Irishman who doesn't own bank stocks. I mean when the banks make big profits do they share them with the average Irishman? Hell no!!!!!!!!!!!! Banks go broke taxpayers pay. What foolishness. What wealthy bondholder are the Irish really protecting?
    • govparasite 2 days 4 hours ago
      hehehehe...pretty neat system we devised huh ? all out love,
      global banksters and our politician puppets...
  • We The People!  •  Bergenfield, New Jersey  •  2 days 2 hours ago
    I believe the Greeks who are pulling money out of the banks are the conservatives, who once believed austerity (no matter how hard), was the only answer the Greece's out of control debt.
    Most of these conservatives were unaware that the Solcialist party would take power, and with the support of strong union leadership, the Socialists look to get the power they've been asking for. Sunday (June 17th), will be the deciding factor.

    Socialists don't have much in the way of money, as these irresponsible union workers spend ever dime the receive. I call them Greece's entiled. Just like those here, who have driven our country to near bankruptcy.

    We are seeing our future unfold before our very eyes.

    This administration (even with them refusing to accept reality), act just like the socialist-minded Europeans, that have cause global growth come to a hault. They also demonize the rich, beleive they deserve theirs and heck with the debt.

    Sound familar?
    • UGLY KID 2 days 2 hours ago
      Not the Post I expected from Bergen County....lol
      You hit the nail on the head..
      It's unfortunate that the USA funds 60% of the IMF
  • Patriot for now  •  2 days 6 hours ago
    And all this seems to started with irresponsible borrowing in Europe and was triggered when a real estate bubble burst. Sounds familiar! The USA is next or is it Japan?
  • UGLY KID  •  Toms River, New Jersey  •  2 days 2 hours ago
    Americans NEED JOBS.....
    We do NOT need to be sending our tax dollars to Europe....
  • UGLY KID  •  Toms River, New Jersey  •  2 days 2 hours ago
    KEEP American DOLLARS in America.....HELPING Americans.....
    SCREW EUROPE.....
  • UGLY KID  •  Toms River, New Jersey  •  2 days 2 hours ago
    'the U.S. has done little about it."
    WE ONLY FUND 60% OF THE IMF.......AND THAT IS TOO MUCH!!!!!!!!!!!!
  • govparasite  •  2 days 3 hours ago
    Free American private sector citizens must ask how we look away and allow DC criminal puppet politicians to carry out the daily robbery of our wealth by global socialist banksters....
  • Dickie Cee  •  Columbus, Indiana  •  2 days 6 hours ago
    In Bankers We Trust!
  • James  •  2 days 1 hour ago
    Greece, two bail-outs in two years, this third one seems like just throwing good money after bad.
  • govparasite  •  2 days 4 hours ago
    Those no good Germans...how could they not transfer ever more of their private sector working citizens wealth over to the Greek socialist parasites black entitlement hole much sooner...
  • Kevin  •  Arlington, Virginia  •  2 days 4 hours ago
    RE: The European economic crisis has been three years in the making, and its outcome is uncertain.

    Actually it been ten plus years in the making. I'll starting my clock with cooking the books to join the Euro, then the spending spree on cheap credit because of being in the Euro zone, three years ago was when an honest Greek politican revealed to the rest of the EU the actual size of the budget deficit. The last three years has been everyone trying to dig their way out of a hole, only to make it wider and deeper.
  • David Doney  •  Fort Wayne, Indiana  •  2 days 3 hours ago
    Great summary. Bear in mind, when the U.S. bailed out AIG ($100 billion or so) a lot of that went to European banks. So we have done quite a lot so far, and will likely have to do quite a bit more.
  • joe s  •  2 days 3 hours ago
    Why does a "cheat sheet" not have the words "entitlement" and "socialism"? When will there be an article even suggesting that Europe's entitlement and socialism is a factor?
  • blame yourself  •  2 days 4 hours ago
    The citizens of Europe must fight against haveing a " large " central government and a central authority over their freedom and dignity or be crushed by it and denied personal liberdad.

    By now , one would have guessed they would have figured it out , but obviously not.

    It repeats over and over and over again.

    Choose wisely. Don't vote yourself other peoples money, vote for the freedom not to have to.
  • Randy  •  Salt Lake City, Utah  •  2 days 4 hours ago
    That is why the world is in this crisis cause all of the politicans are cheating. If they were all kicked out of their coshy jobs and the people were in charge we could fix all of these problems that the politicans created.
 
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