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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

May 24, 2011 at 10:00 AM

Plumbing the depths of the European financial mess

How much should Americans worry about the ongoing sovereign debt problems in Europe? The answer is complicated, cloaked in the unknowns regarding the interconnectedness of the world financial system, exposure of major banks and the speed with which trouble — especially the kind that surprises the markets — travels. So far, Wall Street’s not that worried. That could change.

Greece is the most immediate problem: Too much debt from the boom, an inefficient tax-collection system and a productive economy too weak to dig itself out. Its debt sits on the books for years out, ready to reset every year at more disadvantageous rates. The playerz are betting against it, making recovery even more difficult. European leaders will probably have to commit another bailout all the time asking themselves, sotto voce, why the heck they allowed Greece into the Eurozone in the first place.

Portugal is in a similar mess. Ireland, which we addressed yesterday, is different in that it went into hock to bail out its banks. Spain is a much larger economy, and if it falters more the stakes would rise exponentially. Remember, European banks are heavily exposed here. Moody’s plans to review a dozen U.K. banks for possible downgrades. Italy, another big European economy, is also suffering. France and Germany are doing much better.

Doomsday is the collapse of the Euro. Germany won’t let it happen. A Greek default is another matter and quite possible. As in America, so many of the distortions and bad bets made during the easy-money years have yet to be worked out. Then we have to wait to see how bad is the contagion. And whether it travels across the pond. Even uncertainty can further slow a very weak recovery. Add inflation pressures while wages stagnate or another price spike in oil, and you’re talking trouble.

Today’s Econ Haiku:

New house sales rise, yea!

The next report may be glum

Bi-polar wishing

Comments | More in Eurozone

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