Understanding the European Debt Crisis - Part One

In recent weeks the contentious debate in Washington over the debt ceiling increase, the nation’s budget and deficits, and the Standard & Poor’s downgrade of our nation’s credit rating, has convinced most Americans that the United States has been borrowing heavily to pay its bills. To make matters worse, other economic indicators are pointing to slowing economic growth, raising the concern among some investors that we may be headed for another recession. Yet despite these grim developments, the world financial markets still view the U.S. as a strong credit that will be able to pay its bills and continue to lend us the money we
need at very low interest rates.

Unfortunately since the 2008 global financial crisis, a similar scenario has been playing out in several countries in Europe. They have been spending money that they don’t have by borrowing heavily. At the same time economic growth in many of the European countries has slowed significantly. Unlike the U.S. however, the bond ratings agencies have initiated a series of downgrades on the government debt of these troubled countries, which has reduced the value of the bonds that investor’s hold and simultaneously driven up interest rates making it prohibitively
expensive for these countries to borrow additional funds in order to pay their
current expenses.

This situation has resulted in the need for a series of fiscal bailouts to prevent these countries from defaulting on their debts. The bailouts have been orchestrated by Germany and France and carried out primarily by the European Central Bank (ECB) and in some cases, the International Monetary Fund (IMF). The countries that have been bailed out so far include Greece, Ireland, Spain and Portugal.

Now that we have established what the European debt crisis is, my next few blog entries will explain how the fiscal problems in these countries evolved into the current full blown economic crisis that is affecting markets across the globe and the corrective actions being taken to help stabilize the situation.

This blog entry is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any
decisions.