What the Latest Euro Area Debt Market Instability Tells Us

by Jacob Funk Kirkegaard

Peterson Institute for International Economics
April 20, 2011

While much commentary in recent days have been focused on Standard & Poor’s (S&P) “shot across the US Congressional bow” with its negative outlook on US federal debt, it was actually euro area policymakers who received the most serious recent “market reminder” about the still perilous state of their plan to stabilize euro area peripheral governments.

Just how fragile the euro area financial circumstances remain is amply illustrated by the fact that a few speculative media reports about an imminent Greek debt restructuring managed to create the kind of euro area debt market contagion to Spain and Italy that the recent Portuguese request for a financial bailout did not.

Greece’s enormous current debts are well known, so that an un-sourced story in a Greek newspaper about a “senior IMF” official had confirmed that Greece had already requested a maturity transformation of all Greek debt (e.g. involuntary restructuring), plus an equally un-sourced story from Reuters about “German government sources’” discussion of the need for Greece to restructure by the end of the summer, could cause such a market trauma and contagion suggests several things;

More