Euro May Face Threat Not Only From Distressed Country Debt But Also From Strong Countries Not Wishing To Absorb That Debt

Wednesday, July 11, 2012 08:08
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Euro May Face Threat Not Only From Distressed Country Debt But Also From Strong Countries Not Wishing To Absorb That Debt

Tags: currency | euro | European zone

Spain is scrambling to comply with the edicts from Europe’s finance ministers to get its debt situation back in compliance with European Union standards in order to receive aid to its failing banks. It has come forth with a fourth budget within a seven-month period. This one would trim Spain’s budget deficit by €65 billion ($80 billion).

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The budget effort follows the relaxation of terms for Spain to access the credit it needs and also offers the distressed country more time to come back into compliance with its debt to gross domestic product ratio.
 
At the same time, Finland says the existence of the euro has never before been so threatened. Last week, Finland’s finance minister said that his country would rather exit the euro than pay down other countries’ debts. It is opposed to a collective effort to manage Eurozone country risks and, although committed to the euro, does not wish to hang itself in order to preserve the unified currency.
 
Instead, it is negotiating with Spain directly for collateral to be offered Finland in exchange for its aid in helping Spain resolve its debt issues. Finland also demanded collateral from Greece during negotiations in 2011 for one of its bailout packages.
 
Spain will also have to yield control of its banks to European regulators and require local investors to take losses on junior bonds and preferred shares issued by the country’s distressed banks. This will place greater burdens on small depositors of these banks. The European Summit mandated strict oversight in return for direct financial infusion into the banks (as opposed to giving the money to the Spanish government to then distribute).
 
The short-term agreements hammered out at the Summit offer a taste of how a unified banking oversight authority might function. Ordinary bank investors may be hit hard while holders of senior debt may escape responsibility, as has been the case in other bailout packages across Europe.

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