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Will the euro crisis repeat history?
Steve Chiotakis: Today, eurozone finance ministers will be looking at ways to beef up the so-called bailout fund, which is supposed to prevent countries such as Greece and Spain from going bust. Meanwhile, the debt crisis is having a profound effect on European banks and their ability to lend.
Marketplace’s Stephen Beard is with us live from London with that story. Hey Stephen.
Stephen Beard: Hello, Steve.
Chiotakis: Of course we all remember the credit crunch from three years ago. Is something like that happening now?
Beard: Yes. I mean, what happened then: banks stopped lending to each other because they didn’t know who was sitting on the biggest losses from sub-prime mortgages — and that led eventually to a global recession.
What’s going on now in Europe is similar, except it’s not mortgages, but eurozone government debt that’s the main problem. As fears have grown that European governments might default, investors have shunned teh banks that lend the governments a lot of money.
U.S. investors in particular have pulled billions of dollars out of the eurozone. And as a result, the banks have been hoarding their cash, and cutting back on their lending.
Peter Tal Larsen of website Breaking Views thinks it could be worse this time than three years ago.
Peter Tal Larsen: I think what we’re seeing now is a more severe credit crunch really because it looks like it’s going to go on for longer and there are no obvious solutions in terms of government support, because governments are not really in the position to support banks in the same way that they were in 2008.
Chiotakis: So that sounds bad Stephen — just how much damage do you think we’re going to see?
Beard: Well, it could be very bad. The OECD — the organization of leading countries — reckons that not only could the eurozone slip into recession next year, but the U.S. could be affected too. The OECD has cut its forecast for U.S. growth next year down from 3.1 to 2 percent.
Chiotakis: Stephen Beard joining us from London. Thank you, Stephen.
Beard: OK Steve.
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