12/15/2011 05:31 pm ET | Updated Dec 15, 2011

As Euro Crisis Continues, Bank Downgrades, Credit Squeeze Signal Possible Return To 2008

The situation in Europe is hitting global credit markets, making it harder for companies and banks to secure loans. Investors are buying fewer corporate bonds, and banks are finding it more difficult to borrow from each other. On Thursday, as the European Central Bank again resisted pleas for it to rescue the eurozone, worries about a severe credit crunch along the lines of the 2008 crisis grew.

"In some ways this is part two of the U.S. financial crisis," said Srinivas Thiruvadanthai, an economist at the Jerome Levy Forecasting Center.

Credit rating agency Fitch Ratings downgraded nine major banks on Thursday, including Goldman Sachs, Bank of America and Morgan Stanley. While acknowledging that the banks are in better shape now than in 2008, the rating agency cited vulnerability to the increased market turmoil stemming from "economic developments and regulatory challenges."

Many fear that one cataclysmic event -- such as the default of Italy or a major European bank failure -- could freeze credit markets, plunging the world into a recession similar to the downturn resulting from the bankruptcy of Lehman Brothers in 2008.

"As the situation in Europe goes, so does the global economy," said Adrian Miller, fixed-income strategist at Miller Tabak Roberts Securities.

Miller said that the bond markets have been moving in sync with the European crisis; recently he's noted that investors are growing wary of lending even to so-called safe businesses. Global investors are buying about 40 percent fewer new high-quality U.S. corporate bonds than in mid-May, according to Miller. Meanwhile, there's been about a 70 percent plunge in the purchasing of new, risky U.S. corporate bonds: While global investors bought about $8 billion of these bonds per week in mid-May, now they are buying just $2.5 billion.

As European banks slash lending in order to meet new capital requirements, European companies have been hit somewhat harder. Purchases of newly issued risky European corporate bonds have plunged about 80 percent since mid-May, according to Miller.

Banks also are finding it harder to borrow from one another. It is now more than twice as expensive to secure a three-month loan from another bank than at the beginning of August, according to Rich Gordon, managing director of fixed-income market strategy at Wells Fargo Securities.

On Thursday Fitch downgraded Bank of America and Goldman Sachs' long-term debt to A from A+, Barclays' long-term debt to A from AA-, BNP Paribas' long-term debt to A+ from AA-, Credit Suisse's long-term debt to A from AA-, and Deutsche Bank's long-term debt to A from AA-.

The downgrades reflect "balance sheet damage" emanating from the increased riskiness of European sovereign debt, but they would not result in any major economic repercussions, said Michael Spence, a Nobel Prize-winning economics professor at New York University's Stern School of Business. "There has been some significant credit tightening already," Spence said.

He added that the Federal Reserve ultimately would step in if credit markets dry up. "If left unattended, it will cause some damage, but I don't think it will be left unattended," he said.

In a speech in Berlin on Thursday, European Central Bank President Mario Draghi disappointed investors when he repeated that the bank would not come to the rescue and step in to buy large amounts of government bonds. "There is no external savior for a country that doesn't want to save itself," Draghi said. In an attempt to reassure the audience and jittery investors across the globe, Draghi said that "a return of confidence," stemming from government budget cuts, likely would materialize and mitigate the economic damage of austerity measures in struggling countries.

Observers were not reassured. "There isn't any likelihood of it [confidence] returning," said Jay Bryson, global economist at Wells Fargo Securities. Bryson added that the ECB is the only organization with the firepower to save European countries and banks from default, and that ultimately when it seems to have no other choice, it will most likely step in.

"Authorities at least in the past have always blinked, or generally have always blinked," Bryson said.

Markets slightly recovered but remained cautious on Thursday after the previous day's turmoil. The interest rate on 10-year Italian government bonds fell slightly but remained above the unsustainable 7 percent level. Russian leaders said that they would step in to help, indicating that the country would lend more than $10 billion to the International Monetary Fund, as a backstop for struggling European governments.

Europe's troubles first came to light in 2010 when Greece's debt troubles caused a financial panic. And the situation continues to evolve, reminding some of the slow motion pace of the U.S. housing market collapse, which took hold in 2007 and triggered the financial crisis in 2008.

After Lehman Brothers declared bankruptcy in September of that year, banks stopped lending to each other, fearful that more failures were coming. Banks hiked the cost of their loans to other banks (like they're doing now), making it more difficult for banks to come up with the capital necessary to cover all of their liabilities. Meanwhile, as more investments in the housing market fell apart, banks were forced to pay out insurance on those mortgage defaults. But they didn't have the money.

Companies that relied on short-term financing to maintain their daily operations found themselves on the brink of shutting down, as loans became prohibitively expensive. Major banks were about to fail.

After the U.S. Treasury and Federal Reserve rescued the U.S. banking system from collapse, credit remained tight in 2009, and companies that were unable to secure loans ended expansion plans and laid off workers, reducing consumer demand and worsening the economy. That forced companies to cut even more workers and making lending even tighter.

Though the vicious cycle of layoffs and reductions in lending has ended, it could resume again if the crisis in Europe spirals out of control with a default by the Italian government, said Stijn van Nieuwerburgh, associate finance professor at New York University's Stern School of Business. "As banks become less and less solvent, or their bottom lines are hit, they'll be less inclined to do risky lending," he said.

Catherine New contributed reporting.

12/30/2011 5:29 PM EST

Global Stock Markets Lost 12 Percent Of Value, Or $6.3 Trillion, In 2011

Investors in global stock markets lost $6.3 trillion in wealth in 2011 largely because of fears of a eurozone breakup, according to The Financial Times. The value of global stock markets fell 12 percent to $45.7 trillion.

From the FT:

The S&P 500 is flat this year while the FTSE 100 has only dropped 5.5 per cent. But the Eurofirst 300 gauge of blue-chip European companies has lost 11 per cent, led by the French and Italian exchanges. The MSCI Emerging Markets index has shed a fifth of its value despite strong growth in China and other emerging markets.

Asian equity markets were hit particularly hard with Japan’s Nikkei index losing 17.3 per cent this year, Hong Kong’s Hang Seng index 20 per cent and the Shanghai Composite 22 per cent.

--Bonnie Kavoussi

12/30/2011 2:08 PM EST

Subsidy Cut Threatens Italy's Newspapers

Up to 100 Italian newspapers will be forced to close after the Italian government slashes subsidies to newspapers in the name of shoring up its finances, according to The Financial Times.

The subsidy cut amounts to a 69 percent cut in funding for newspapers, according to the FT. It was ordered by the government of the previous prime minister, media magnate Silvio Berlusconi, and approved by the new government of Mario Monti. Though the newspaper industry is in decline, some say that these local and sometimes partisan newspapers give voice to stories that the mainstream media ignores, according to the FT.

Staffers at the communist daily Liberazione, which has 5,000 readers, are staging an occupation of the newsroom this weekend to prevent the owners from shutting down the paper after its possible last issue is released on Saturday, the FT reports.

--Bonnie Kavoussi

12/28/2011 10:28 AM EST

Investors Unmoved By Lower Borrowing Costs For Italy

Investors were unmoved by the steep fall in Italy's short-term borrowing costs on Wednesday, as Italy's long-term borrowing costs stayed elevated and European stocks fell.

The interest rate on Italy's six-month government bonds fell by half to 3.25 percent at an auction on Wednesday: a vote of confidence in Italy's ability to pay off its debts for half a year.

But investors remained skeptical about Europe's long-term economic prospects. The DAX in Germany plunged 1.04 percent on Wednesday, the CAC in France fell 0.38 percent, and Italy's FTSE Italia All-Share neither gained nor lost ground. The interest rate on Italy's ten-year government bonds remained unsustainable at 6.80 percent.

--Bonnie Kavoussi

12/28/2011 10:08 AM EST

EU Admits That Austerity Will Lead To Higher Youth Unemployment

The European Commission admitted in a report in mid-December that its medicine for the sovereign debt crisis may be poison for Europe's long-term economic outlook.

The report said, according to The Wall Street Journal, that the imminent economic slowdown in Europe, caused in part by a contraction in government spending, will worsen job prospects for young people, and "young people remain the hardest hit by the crisis and its aftermath." The report added that "income shocks may prove permanent."

The youth unemployment rate in the European Union is disastrously high at 20 percent, with a high of 48 percent in Spain, according to the WSJ.

--Bonnie Kavoussi

12/28/2011 10:05 AM EST

European Safe Haven Deposits Reach All-Time High, Again

The European sovereign debt crisis is turning into a banking crisis.

After breaking a record just a day earlier, the amount of overnight deposits parked at the European Central Bank's overnight deposit facility reached another record high on Tuesday: $591 billion, a 10 percent increase from $538 billion the day before, according to The Wall Street Journal.

The deposits attract an interest rate of just 0.25 percent and could translate into a loss for banks, highlighting the rising level of banks' distrust in any risky lending as banks seek to shore up capital to meet new regulatory requirements.

--Bonnie Kavoussi

12/27/2011 3:27 PM EST

Italy Suffers From Worst Christmas Shopping In Ten Years

Italy suffered from the worst Christmas shopping season in ten years, according to the Italian consumer group Codacons, Bloomberg News reported.

Italians spent $62.75, or 48 euros, less per person during the holidays this year than the average of the past five years, according to Codacons.

Shoe and clothing stores suffered the most, with sales in that sector plunging 30 percent compared to previous years, according to Codacons.

As the Italian government seeks to rein in its debt by slashing spending and collecting more in taxes, Italians are cutting back in their spending, which will continue to hurt the economy. Italy's latest austerity plan will cost every Italian family about $1,476, or 1,129 euros, according to the Italian consumer group Federconsumatori, Bloomberg News reported.

The FTSE Italia All-Share, Italy's main stock index, fell 0.85 percent on Tuesday.

--Bonnie Kavoussi

12/27/2011 10:18 AM EST

European Safe Haven Deposits Reach All-Time High

Banks parked a record high number of deposits in the European Central Bank's overnight deposit facility, which is considered to be a safe haven, according to The Wall Street Journal.

Banks deposited $538 billion, or 412 billion euros, overnight at the ECB on Monday, up 19 percent from $453 billion, or 347 billion euros, on the Thursday before Christmas, according to ECB data cited by the WSJ.

The high level of overnight deposits reflects the rising level of distrust in inter-bank lending, in conjunction with continued liquidity in the eurozone markets as the ECB lends more to banks, the WSJ noted.

--Bonnie Kavoussi

12/27/2011 9:55 AM EST

French Unemployment At 12-Year High

The number of people without jobs in France reached a 12-year high in November, placing pressure on French President Nicolas Sarkozy's reelection campaign, according to Reuters.

France's labor ministry reported that the number of registered jobseekers in France rose to 2.85 million, 1.1 percent more than in October and 5.2 percent more than during the same period last year, according to Reuters.

The unemployment rate in France rose in the third quarter to 9.3 percent from 9.1 percent in the second quarter, according to France's national statistics office, Reuters reported.

--Bonnie Kavoussi

12/27/2011 9:39 AM EST

Post-Christmas Shopping Boosts European Stocks

The stock prices of European retailers rose after reports of shoppers flooding stores both in Europe and the United States on Monday, the day after Christmas, according to The Financial Times.

The stock price of German retailer Metro rose 1 percent on Tuesday, France's Carrefour rose 0.6 percent, and Swiss watchmakers Swatch and Richemont rose 0.7 percent, according to the FT.

The DAX stock index in Germany rose 0.23 percent, while the CAC 40 in France fell just 0.03 percent.

--Bonnie Kavoussi

12/20/2011 2:11 PM EST

EU Rolls Out Plan To Combat Youth Unemployment

In the face of growing youth unemployment across Europe, the European Commission has launched what it calls the Youth Opportunities Initiative, a program aimed at getting more of the continent's young people into the workforce.

Per a press release from the European Commission, the program will allocate 4 million euro toward getting young people into employment, education or training within four months of leaving school.

At the moment, the EU has a youth unemployment rate of about 21 percent, meaning that 5 million young people are out of work. According to the European Commission, a total of 7.5 million people age 15 to 24 are not employed, attending school or involved in work training.

The lack of opportunities for Europe's young people has inspired protests and riots in some countries and mass migrations in others. The problem is expected to grow worse if Europe tips into a recession, or if the EU's many heavily indebted countries impose austerity measures to rein in deficits.

-- Alexander Eichler