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European Debt Crisis Deepens, Spreads to More Countries

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The 85-billion-Euro bailout of Ireland could not convince markets that the crisis would not spread to other indebted Eurozone countries. On Tuesday, the debt costs of Portugal, Spain, and Belgium touched all-time hit their highest levels in the Euro’s 12-year history. Late on Tuesday the S&P ratings agency placed Portugal on a credit watch over its huge debts, signalling that it would be the next country to ask for joint aid from the EU and IMF, as per BBC news.

Bond Yields

Portugal’s central bank warned about the risks being faced by its banks. A failure of the Portugal government to consolidate public finances may lead to Portugal’s banks facing intolerable risks, the central bank warns. France has already come forward saying it would help support Portugal and Spain if the need arises. Financial officials in France and Germany accused investors of acting irrationally to the threat of financial contagion.

Eurozone debt and bond costs

The yield on Spain’s 10-year bonds reached to 5.7% on Tuesday, a record difference of 3.05% compared with Germany’s 10-year bond. The bond spread for Italy’s 10-year bond was at 2.1 percent over Germany’s bonds and the Irish bond yield stood at 9.53%; the Portuguese yield stood at 7.05% for 10-year bonds. However, the yields for government bonds of these countries were reportedly to be lowered on Wednesday on speculation that the European Central Bank would take extra measures to save the Euro from falling, Reuters reported.

Germany’s Dilemma

Reuters quoted a Citigroup economist as saying that the Eurozone crisis could soon spread to the US and Japan. The officials of ECB, EU, and EC are rushing to give statements to inject confidence among investors on Eurozone stability. Some analysts are expecting ECB to increase its bond purchase programme from Eurozone region governments, while some ECB officials are opposing such a move. Germany’s Chancellor Angela Merkel is one such, sceptical of providing further funds to indebted countries as that would force Germans to bear the lion’s share of the bailout programmes.

But Germany is increasingly facing a dilemma: whether to do more to save the monetary union or to leave it to disintegrate. On the other hand, they are forgetting the important fact that decreasing labour costs would lead to decreasing purchasing capacity among the people, which is the basic factor in increases or decreases in consumer spending. Thus, the measures taken by the governments to increase the productivity of capital are ultimately leading to a decrease in consumer spending, which pushes down the growth rate. This is the basic contradiction inherent in the capitalist productive system that forces unequal income distribution in society.

Fresh Debts

Portugal and Spain are going to raise fresh debt from the markets later this week. Portugal will auction government bonds worth 500 million Euros on Wednesday and Spain on Thursday. S&P said that the Portuguese government has not done enough to boost labour flexibility and productivity, which means that it did not decrease labour costs to help investments become more productive. There are several other ways to increase the productivity of private investments but these capitalist investors choose only lessening wages because it is the only factor that would increase productivity significantly compared to other factors.

Identical Conditions

The process for a country to tap the European Financial Stability Facility (EFSF) has become almost identical in every country. Such situations are made easily predictable for investors and analysts, thanks to the rush of heads of state to declare that their countries need no bailouts from the outside. It is not clear whether markets are forcing the countries to tap EFSF or their financial worries are forcing them to do so.

For example, Ireland was forced by Spain and Portugal to claim aid on fears that the contagion would spread to them. Though Ireland said it was funded fully up to the first half of next year, it was forced to tap the aid facility because of fears of contagion. Nevertheless, the Ireland bailout could not stop the contagion from spreading to other countries. Investors are demanding higher yields from the bonds of Portugal, Spain, Belgium, and Italy, even though Ireland was bailed out.

Greedy Finance Companies

If we remember that investors include not only individuals but also investment banks and other derivative funds and commercial financial institutions, we may get a clue about this. These investors are out to cash in on the critical financial situations of the most indebted Eurozone countries and push bond costs upwards. We may also remember that the Greek government had repeatedly requested the US government to control Wall Street banks’ betting on Greece’s debt. This means that, apart from the actual financial situation of the indebted countries, profit-motivated, greedy financial firms are helping to advance the date when these countries claim EFSF aid. If these financial firms would stop betting on debts of indebted countries, the situation would definitely be different.

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About Sekhar

  • Ruvy

    The “PIGS” (Portugal, Ireland, Greece, Spain) are being stuck in a blanket to cook. I can smell the pork all the way over here in Samaria, Sekhar, and it is a joy to see the countries that have spit on my people for millennia suffering. And the suffering will spread, along with the gang rape, culture clashes and all the other fun the Europeans are experiencing. I think the phrase “schadenfreud” is the term appropriate to how I feel about all this. As the euro weakens, speculative pressure will slowly switch to the dollar and sterling – while the rich boys are finally getting smart and buying gold.

  • http://financialpolitics.net/ Sekhar

    Ruvy, Let us not wish what you asked for. We have to learn good lessons from the history, not the bad ones. We have to see that the bad experiences may not repeat, after knowing how much sufferings the people have gone through, from the history. Let us wish good to everyone irrespective of what their fathers did to our fathers. We cannot correct the history, you know. We can only learn what is good and what is bad to see that the bad may not repeat.

  • Ruvy

    The bad repeats itself, Sekhar, over and over again. So since “die Deutscher schwein” have decided to repeat the bad, let the curse of history be upon them and all the Eurotrash who agree with them and who curse my people. Let their economies fall, let the parents and children die from hunger, as Jews did in concentration camps and sieges over the millennia, let the Arabs gang rape their women and let the men feel the humiliation of not being allowed to take vengeance.

    Let evil be repaid with evil, and let there be judgment on these “people”. Let those who curse Israel be accursed – and those who bless Israel be blessed.