Banks, Corporations Trying to Limit Exposure in Europe Due to Eurozone Debt Crisis
The U.S. stock market rallied Friday on hopes that the most recent bailout would save the common European currency and thus reduce the risk of economic and banking problems around the world. Almost immediately, however, cracks started showing in the new bulwark against global economic disruption. Not only did the U.K. refuse to join in the deal, but banks and corporations are continuing to move their money out of the most troubled parts of the Eurozone.
In theory, the euro should be savable. The European Union is not in such bad shape when viewed in the aggregate. The hope for a successful bailout plan always begins with the fact that Europe would be OK if it could just average out its deficits and its debt among all the individual countries. Indeed, though a handful of countries in the Eurozone have annual budget deficits of 6% to 10%, the average is just over 4%. (By contrast, the 2011 deficits for both the U.K. and the U.S. are around 10%.) And the deal announced last week could bring deficits more or less into line by imposing tighter deficit limits on all 17 Eurozone countries.
The problem is that some countries - most notably Greece and Italy - already have extremely high levels of debt equal to more than 100% of annual GDP. Overall, the Eurozone has to refinance more than a trillion dollars of debt in 2012. To help rolling over that debt, Friday’s deal boosted the amount of money backing the bonds of overindebted countries (by accelerating the creation of a second fund, the European Stability Mechanism, in addition to the European Financial Stability Facility). But there are various restrictions on the use of these pools of money. And there is no guarantee that they are large enough and flexible enough to ensure that all the necessary funds will be available as existing bonds come due and new ones need to be sold.