Europanic Spreading

Stocks surged recently when a new plan for dealing with Europe’s sovereign debt was announced.  Then they came crashing back down when it became clear that the plan was more style than substance.

The continental crisis is much deeper than initially advertised, and the future of the euro, the European Union and Europe’s banking system is being threatened.  Likewise, though, when someone sneezes in Greece, America catches a cold.  American banks have more than $1.2 trillion in loan exposure through German and French banks, which is one reason why the sovereign-debt crisis has affected U.S. markets.

So how deep is the crisis and what impact can we expect in the U.S.?

Stratfor Global Intelligence recently noted that the plan agreed upon to date is “not even more than a baby step on the road to saving Europe.”

Stratfor Vice President of Analysis Peter Zeihan further noted that even after writing down a percentage of the debt, Europe is going to need to attract investments from countries like the U.S., China and Japan.  Unfortunately, such investments will likely carry more potential risk than reward.

“And so the Chinese, the Japanese and anyone else who thinks they have a vested interest in the success of Europe,” Zeihan said, “they have to be asking why would I put my money into a system that the Europeans are not willing to back?”

One problem is that profligate spenders aren’t changing their behavior.

“The primary reason Greece has not defaulted on its nearly 400-billion euro sovereign debt is that the rest of the Eurozone is not forcing Greece to fully implement its agreed-upon austerity measures,” according to Stratfor.  “Withholding bailout funds as punishment would trigger an immediate default and a cascade of disastrous effects across Europe.  Loudly condemning Greek inaction while still slipping Athens bailout checks keeps that aspect of Europe’s crisis in a holding pattern.”

Europe is trying to “rescue its rescue,” as The Wall Street Journal put it, but with little success so far.  The Europanic crisis of the day is that Italy is in danger of having financing cut off.  Italy is nearly 2 trillion euros in debt ($2.77 trillion).

The European Financial Stability Facility (EFSF) can’t raise enough to get European debt under control, but it hopes leverage will help.  Leverage … there’s a term we haven’t heard much since 2008.

Coming Soon to the U.S.A.

Europe’s woos should provide a cautionary lesson to the United States, with its $15 trillion in debt.  While a “super committee” is seeking solutions, one party wants to raise taxes without making significant spending cuts, while the other party wants to make cuts without raising taxes.

If the super committee fails and U.S. debt continues to grow, who will bail us out?

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