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SORRY to be so stuck on news in Europe and America; these days it's difficult to focus on much else. Earlier today, I mentioned that yields on Spanish and Italian debt were up sharply to start the week. That increase is partially a product of ongoing consideration of last week's deal and it's implications for the future of the euro zone. It was also influenced by a Moody's downgrade of Greek debt. The ratings agency expressed concern that a Greek default would hit financial institutions in other peripheral countries, and it fretted that, "The support package sets a precedent for future restructurings should the finances of another euro area sovereign become as problematic as those of Greece". In other words, having put together the machinery of a sovereign-debt restructuring, the euro zone is likely to use it more than once. That doesn't mean that the euro zone made a mistake in putting these mechanisms together; it was simply acknowledging the inevitable. But having acknowledged one obvious case of insolvency, it does become harder to delay acknowledgement of other obvious cases.
That's especially true when pressure is being applied from several directions. The Financial Times reports today that a number of European banks with significant exposures to Greece are showing reluctance to sign up for one of the voluntary restructuring options in last week's deal. It's early going yet, but there is growing concern that the estimated 90% take-up of the restructuring offerings was a tad optimistic.
European banks have plenty to worry about, as things stand. European default risk is one worry, but banks are also feeling an impact from the impasse in America. The FT:
US money market funds have sharply cut their exposure to banks in the eurozone over the past few weeks and reduced the availability of credit, even in stronger countries such as France.
While the agreement of a second bail-out deal for Greece might ease nerves, the funds are also stockpiling cash in case US politicians fail to raise the federal debt ceiling, prompting withdrawals from investors.
One French financier said: "Up to mid-June, getting three, six or nine-month money was not that difficult.
"But now, getting one-week or one-month money is about all we can manage".
At the moment, this is undermining euro-zone economic activity and putting additional pressure on stress banks. Should a debt-ceiling impasse lead to real financial market difficulties and a flight to safety, peripheral banks and sovereigns will come under a great deal of pressure. A lot of people will yank their money away from anything that looks vulnerable, and there are a lot of European institutions looking vulnerable right now.
America will probably avoid the catastrophe of an outright default. But it could experience an economic setback serious enough to trigger collapse in Europe. If you think those two dominoes can fall without knocking over any others, you're more optimistic than I am.