European Sovereign-Debt Crisis: The End of the Euro?

      Welcome back, everyone! We hope everyone had a smooth transition out of Daylight Savings Time earlier today.

      As 2012 draws nearer and nearer to a close, our worldwide sensibilities will recognize the conflicts arising in the European economic market. Such is the severity of this recent downturn that many question the persistence of the Euro as a common currency in the near future. As congruent with any major crisis, one naturally must wonder as to why Greece's banks have failed so miserably or why Spain's unemployment rate skyrockets into economic monstrosity. The answer to this question lies in a fundamental aspect of the European market: government debt.

     This crisis, known officially as the European sovereign-debt crisis, arose in late 2009 as a result of the global recession of 2008. As banks around the world pleaded for government bailouts, private debts translated into government debts as the housing and property bubble "burst;" this proved especially significant in Greece, where the entire private sector experienced a collapse. A requested bailout was produced by Germany, ameliorating the Greek structural deficit (whilst simultaneously worsening the recession by inciting spending cuts); despite this, a decline in investor confidence sharply crippled Greek credit. Thus, these factors combined with the resultant political and social unrest have led many to speculate that Greece must eventually leave the Eurozone.

     A similar phenomenon has recently developed in Spain. Before 2010, Spain maintained a relatively low public debt level in comparison to GDP. However, deficits rose by 2011 as a result of the European bailouts. This rise in national debt experienced a snowball effect in early 2012 as interest on Spanish bonds reached 7%. Several austerity measures and a plan for bank recapitalization have been put into place, but Spain's precarious economic condition remains a vital topic of interest.
    
    As one may observe, the recent financial crisis in the Eurozone can be classified as a "crisis of confidence." The precise ramifications of this difficult situation are unclear, as adjustments in creditor-investor relationships remain murky. One can, however, foresee a definite schism of the European commercial alliance as variations in work ethic and economic austerity become all too important.

-Chris Cattafi, Investment Club, Co-Founder and Vice President