The remarkable feature of the current Eurozone crisis is the near total absence of any understanding of the nature of the present crisis. This sad state invariably worsens the crisis due to the circularity of global finance. Historically, that has been the nature of Europe. Remember the 1920s and 1930s! Till the downgrade of France (on Saturday) by S&P, the magic wand that would save the world from the perfect financial storm was thought to be the EFSF. The downgrade has shown that there is an urgent need for EU countries to conjure up new temporary solutions - like ECB lending more than US$600 billion to banks and they in turn depositing money with the ECB or buying Bonds of debt stricken companies.
A recent article by Bloomberg provided a graphical overview of what we may expect due to uncertainties of debt rollover. The illustration is reproduced below:
The recent round of downgrades clearly indicates that this is not going to be the last. Most of the countries need to rollover more than 10% of their outstanding debt in 2012.
An interesting facet has been pointed out by a fund manager: rising cost of capital is likely to bankrupt a number of countries - an issue we have highlighted in the past in our postings is the bankruptcy of all the countries which are facing bond market pressures. A country or company borrowing at 24% is more likely to be insolvent than solvent. Portugal is definitely in the list of insolvent countries as their borrowing costs have hovered around 12% for more than a year. In the next two years, Italy and Spain are likely to follow suit.
Two years ago we were told that a 110 billion Euro bailout for Greece would be suffice. We were one of the few sceptics. Two years ago throwing two trillion Euros would have solved the crisis, now the tab is probably close to about 5 trillion.
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