Saturday, July 12, 2014

A Scary Warning From Portugal About Europe's Doom-Loop Risk

Why would financial problems at a little-known Portuguese bank send a shudder through markets worldwide? It happened today, as equity markets slumped sharply after the parent company of Lisbon-based Banco Espírito Santo missed payments on its short-term debt.
What’s spooking investors is the risk of a doom loop. That’s a vicious cycle in which weakened banks lean on governments for support, draining the public finances, which in turn drag the banks down with them. It was the fear that overshadowed all others during the worst days of Europe’s debt crisis. And despite the progress made in easing that crisis, ”policymakers have done little to weaken the doom loop between banks and sovereigns in the euro zone’s periphery,” says Jennifer McKeown, senior European economist at Capital Economics in London.

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