The problem: A shrinking economy straining its budget. The country has been the third to get a bailout, worth 78bn euros. The previous government fell after failing to pass austerity measures, which the subsequent government had passed. Investors have since moved on to ongoing worries about Greece, Spain and Italy. Ratings: Portugal has been cut four times since It was once triple-A, way back in What is a rating agency? European Commission data on EU economies.
Image source, Reuters. Protests in Rome over the austerity cuts, the latest in a series of protests across Europe. Crisis jargon buster. Use the dropdown for easy-to-understand explanations of key financial terms:. The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.
Moody's: Ca. Moody's: Aa2. Moody's: Aaa. Moody's: Ba1. Moody's: Ba2. Many investors and analysts are still betting that Greece swallows its medicine, clearing the way for an EU and IMF rescue.
And if the country does blow, the aggressive action by countries like Ireland and Spain to improve their fiscal stability could still avoid an economic chain reaction. For now, though, the environment in Europe is frighteningly opaque. The only certainty is that Greece is closer to the edge than ever. Please enter email address to continue. Please enter valid email address to continue.
Do other countries labor under the burden of overly generous pension systems? Do other countries have a tax evasion problem? The Eurozone members, led by Germany, have been stern with Greece. They offered to bail it out only if Greek officials adopted the harshest kind of austerity measures. The Greeks did, and the measures completely tanked the economy, as austerity measures tend to do to economies in trouble. Something like 50 percent of young Greeks are unemployed, and people are rioting in the streets.
Bear Stearns failed and was rescued in early The auction-rate securities markets failed in the first half of , monoline insurers encountered major difficulties during the spring, and, if not for some creative behind-the-scenes work, the student-loan market would have failed by that summer.
The week before Lehman failed, Fannie Mae and Freddie Mac, both on the edge of bankruptcy, were placed into conservatorship. On the weekend that the Lehman deal fell through, Merrill Lynch, also on the brink, was saved by Bank of America. Although GM and Chrysler crashed post-Lehman and were kept alive by a government loan, their troubles resulted from the decline in auto sales, coupled with noncompetitive costs.
The sum of these events was more than enough to be called a financial crisis and to worsen the recession that was already under way. Lehman's demise may well have been an exacerbating factor in the financial crisis and perhaps things might not have been as bad had Lehman not failed.
That likely triggered a run on money markets. Other markets may also have been affected by Lehman's demise. One does not have to deny the role of contagion to believe that Lehman was not the domino that toppled the others. But our financial crisis was caused by factors that affected the entire system, just as all corn kernels pop when they are warmed by the same flame.
This lesson is important because interpreting our crisis as primarily a contagion event leads to the wrong strategies for dealing with potential disasters. After Lehman, Europeans seem to be so taken with worries of contagion that they are failing to emphasize remedies that actually have a chance of making things better.
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