European Debt Crisis: A setup for Global Collapse?

As we close the year on a flat note for the US stocks, investors are rightly worried about the far reaching impact of the European crisis as it threatens to put breaks on the ongoing recovery in the US. At this point in time, when most investors are busy assessing and rebalancing their investment portfolios, the precarious state of European Crisis is mounting fears that the worst is still to be seen in 2012. Let’s take a closer look at where things stand today and what are the possible ‘best and worst’ case scenarios that could play out in the times ahead?

At present, the European crisis has caught many economies off-guard and now the worries of this crisis spreading beyond the European Financial System have escalated. Nevertheless, the current situation worsening further could see a spill over impact in developing economies such as India and China who are already struggling with slowing growth. US will not remain immune to such a situation and whatever taped recovery is going on could see a hard landing in 2012.

Current State of the European Problems

Greece is deep under waters, Italy is barely afloat, and the situation in Portugal and Spain remains wobbly.

These are challenging times and despite coordinated efforts from central banks the outcome remains uncertain. However, for the time being the Euro Dollar liquidity situation has improved as a result of coordinated interventions, and even the fears of bond sales going bust have eased considerably.

Austerity measures for Greece may not hold up long, and if Europe see’s a deeper than expected downturn, all efforts to save Greece will eventually run out of hopes. Ireland seems to have stabilized, but that’s a tiny part of the European problems. Debt problems in Portugal, Spain and Italy are most likely to stay out of control as these countries are mainly driven on government support and domestic consumption. Lack of competitive spirit in the globalized world where export oriented countries are likely to sustain better, these European nations seem to be on the brink for a hard landing.

What’s aggravating the current European Crisis Situation?

It looks like major European Banks are sensing a catastrophe around the corner; their reluctance to lend is restricting growth and making it difficult to emerge out of this crisis situation. Further dampening of economic activity may result in revisions of debt holdings for most of these banks and if default fears of Italy, Spain or Greece come true, there will be absolute chaos.

At the same time, hopes are fading that Germany will come to rescue its troubled neighbors. The survival of eurozone remains uncertain and it seems the issues pertaining Europe will continue to remain at the centre stage and periodically haunt investors in 2012