Washington Post
July 15, 2011
To most Americans, Europe’s sovereign debt crisis must seem remote and obscure. It started with Greece and spread to Ireland, Portugal and now Italy, the continent’s fourth-largest economy.
Why is a default by any of these countries so threatening? One answer is that one country’s default could trigger a chain reaction in other countries. A second reason is that defaults could bring down banks, which would suffer huge losses on their portfolios of government bonds. A banking collapse could in turn plunge Europe — and indeed the world — back into recession.
We got some sense of the dangers Friday when the European Banking Authority (EBA) reported on the health of 90 major European banks. One indicator of vulnerability: bank holdings of Greek, Irish and Portuguese debt. At the end of 2010, these totaled 194 billion euros ($272 billion at current exchange rates). The total included 98.2 billion euros of Greek debt, 52.7 billion of Irish debt and 43.2 billion of Portuguese debt. About 60 percent to 70 percent of the debt was held by banks of the home country: Greek banks, for example, were the largest holders of Greek debt. A large-scale default in any of these countries would probably doom the local banking system.
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