European Contagion

Terry Flanagan

Europe’s debt crisis may be more self-contained, but the region still lacks regulatory infrastructure.

Market participants have watched the Eurozone struggle with its sovereign debt crisis since late 2009 and early 2010. Countless summits have been held amongst European leaders with discussions on how to bail out struggling banks, and thwart a global Lehman Brothers-esque system meltdown.

“Europe is 25 percent of the world’s GDP (gross domestic product),” said Greg Peterson, director of Research at Massachusetts-based Ballentine Partners. Ballentine is a globally recognized multi-family office and investment advisory firm with clients in the U.S., Canada and Europe. Its family office division serves families with assets of $20 million or more.

“But, Europe’s problem is self-contained, which differs from the U.S.’s situation in 2008—that impacted the entire global economy,” Peterson said. “The region’s troubles might cause some global disruption, but mainly within the sovereign credit default swap market.”

Among the most troubled in the credit default swap (CDS) area are Greece, and Portugal, but these countries hold much less debt than that of Spain and Italy, according to Peterson. Apart from Greece, Peterson is hopeful about Europe’s future.

“Greece’s default will be managed in an organized manner and the European Union will survive,” he said. Ireland will repair itself and Portugal’s problems will not reach Greece-like proportions. A global credit crunch should be avoided; CDS should be settled in an orderly fashion, and European banks will recapitalize relatively quickly.”

Albeit Europe’s debt problems are more meager than the U.S.’s 2008 banking system meltdown, the former lacks the same kind of regulatory infrastructure needed to manage a global crisis.

“There is no mechanism to create regulatory change—no central governing body that can unify solutions, as they exist in the U.S,” said Peterson of Europe’s regulating bodies. “The Europeans need a regulatory body that has the authority to handle fiscal responsibilities.”

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