A Guide to Europe's Falling Dominoes

Supports of the Syriza party wave flags at a rally outside the university building following a second place finish in the general election on June 17, 2012 in Athens, Greece.

Barely had Greece been "saved" by a modestly positive election than investors started wringing their hands about the health of the rest of the Eurozone - with good reason. Below, Easy Street gets you up-to-date on the intensifying signals of distress from major Eurozone countries - and the U.S.

  • Greece: So Greece is "saved," right? Not so fast. The New Democrat party that won yesterday's election did support Greece adhering to its bailout, but it did so by the slimmest of margins, and certainly not enough for a majority. Now it has to make nice with the other parties - including its enemies - to pull a whole government together. In a positive sign, however, Germany - the financial enforcer of Greece's draconian austerity reforms - seems ready to back off a little. German and Austrian finance officials said today that "It is clear to us that Greece should not be over-strained" and "the conditions that were negotiated have to be observed but we also need to give the Greeks room to breathe." This is a positive change in attitude, but is it enough? Douglas Elliott at the Brookings Institution has a nice analysis that you can read here.
  • U.K.: The U.K. wants its banks to keep the country's famous stiff-upper-lip approach to any Eurozone crisis, so last week - before the Greek elections, notably - the Bank of England promised a liquidity program for the country's banks. (Definition break! "Liquidity" means "ready access to cash and ability to borrow." It might help to picture an ocean of cash to swim in, with penty of money as far as the horizon.  Or picture the opposite: what is it called when you can't get any money? Your money "dries up." So liquidity is the opposite of drying up. Since banks subsist by borrowing every day, they need liquidity.) The Bank of England's plan involves providing billions in cheap loans to U.K. banks, starting  on June 20.
  • Spain: Spain quickly took center stage in the markets today as Greece fell to the background. Spanish bond yields are hitting record levels - as high as 7.22% for Spain's 10-year bonds. That indicates that investors are demanding the country pay higher interest rates to compensate them for the risk they are taking by buying Spanish bonds. Even more problematic is the fact that the half-life of a bailout rally seems to be decreasing rapidly. Watching a European bailout is like watching a Hollywood action film: you need to suspend your disbelief to trust that the good guys will win. Investors are having trouble doing that. As Reuters' Jamie McGeevey noted today on Twitter, "last Monday's relief rally for Spanish bonds post-bank bailout lasted just over 4 hours. Today, 2 hours post-Greek vote." Spain's banks are also weighed down with an increasing number of bad loans - and that's besides the core problem that Spain's banks are weighed down with Spain's own bonds. A 100-billion-euro bailout last week didn't do enough to comfort investors.
  • Denmark: Investors love Danish bonds and are snapping them up - first-world problems, right? - but this is actually not great news for Denmark because it's putting pressure on the country's currency, the krone, which is rising fast enough to worry the country's finance ministers. Denmark, like the U.K., didn't adopt the euro as a currency, but the krone is pegged to the value of the euro. As a result, Denmark is feeling the fallout from the European crisis.
  • Cyprus: Cyprus is suffering because Greece is suffering: loans to Greece amount to something like 160% of Cyprus's GDP.  is one of the later additions to the Eurozone, having joined in 2008, and with a population of only 800,000, it doesn't seem like the most prominent member of the EU. But two things may change Cyprus's profile: its rise to the rotating presidency of the EU this year and its drastic need for a bailout. Cyprus is set to take on the EU presidency on July 1st, which is largely a ceremonial role allowing the country to run the EU's upper legislature - but also allows the country a free hand in setting the agenda for the discussion. This may come in handy as Cyprus is in desperate need of at least 1.8 billion euros to save its banks by July 1st. The EU can commit as much as 4 billion euros - but knowing that the EU is short on funds, Cyprushas gone outside the usual borders and asked Russia and for cheap loans.
  • The United States: Europe's weakness could hurt major U.S. companies like Dow Chemical and Hewlett-Packard, which could endanger our already-weak recovery. The U.S. is also contending with a "fiscal cliff"of its own, so Europe's debt problems only add to the sense of urgency. The Federal Reserve is concerned and, according to this Bloomberg story, may even want to extend its current stimulus for another three months. 

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