The Eurozone has held global markets to ransom for several months now. The trouble began with some of the peripheral economies, but is now increasingly becoming a contagion that threatens the political and economic stability of Europe.
Gross domestic product (GDP) will contract 4.7 per cent this year in Greece and 3.3 per cent in Portugal, according to an International Monetary Fund estimate.
There is 24 per cent unemployment in Spain, 22 per cent in Greece and 15 per cent in Portugal. Public debt already exceeds 100 per cent of GDP in Greece, Ireland, Italy and Portugal. These countries, along with Spain, are now effectively shut out of the bond market.
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As for banks in the peripheral economies, traditional sources of bank financing have had to be substituted by financing with external commercial bonds, while money held by high net worth individuals has slowly been exiting. And if Greece were to exit the Eurozone, a deposit freeze would occur and euro deposits in Greece would be deemed much riskier than in other Eurozone countries.
More worryingly, there was a surge of withdrawals from some Spanish banks last month.
The credit crunch in the Eurozone banks on the periphery remains severe. Unable to achieve the new 9 per cent capital target by raising private capital, banks are selling their assets and contracting credit, thus making the Eurozone recession more severe.
Spain's borrowing costs reached around 7 per cent this week, the highest ever since the birth of the euro. Spain's financial woes were compounded after Moody's downgraded its debt rating to near 'junk' status. Italy, widely considered the next victim of the crisis, has its yields trade well above six per cent.
So what are the solutions?
There are no easy ones. Key steps would include bank re-capitalisation, European deposit insurance and debt mutualisation - which involves euro bonds being issued guaranteed by all European Union member-states. This would set a 'risk-free' interest rate and bail out weaker economies.
Germany, one of the few European economies that remain robust, is not convinced. Chancellor Angela Merkel has repeatedly warned against overburdening the German economy in efforts to save the Eurozone. In a speech to the German Parliament recently, Merkel reiterated her refusal to back calls for common Eurozone bonds and a Europewide deposit guarantee scheme for banks.
While most analysts believe Germany will eventually come around, for now the German Chancellor seems convinced that Germany does not have infinite resources to keep underwriting the obligations of one troubled European country after another. Instead it seeks negotiations towards a 'fiscal union' that would bind the members' budgets closer together.
Rating agency Standard & Poor's has said the Eurozone has entered "a crucial phase" in which the outcome of Greece's elections on June 17 and upcoming policymaker meetings "will play a significant role in defining its future direction".
While the global mood is very cautious, Greek stock markets gained 10 per cent on unconfirmed rumours that pro-bailout parties were gaining ground and that the EU was now more prepared to renegotiate the recent rescue deal.
On balance, while Germany insists that austerity is the only way to go, there is a case for not front-loading too much austerity, lest it lead to much slower growth. Any major growth slowdown will hurt Germany too - it sells almost 45 per cent of its total exports to other countries in Europe. Urgent structural reforms are needed to jump-start growth.