European Debt Crisis: Experts Weigh in on Contagion and Private Sector Involvement

As Europe grapples with its ongoing debt crisis, experts are warning that the situation is far from being resolved. Royal Bank of Scotland economist Silvio Peruzzo joins Bloomberg Surveillance to discuss the latest developments, including the recent Moody's downgrade of Portugal and the prospects of private sector involvement in the Greek bailout. Peruzzo notes that the focus is now on the details of the private sector involvement and the second bailout for Greece, which has put investors on high alert until September.

Key Takeaways:

• The downgrade of Portugal by Moody's is not the primary concern, but rather the rationale behind the downgrade, which suggests a similar fate for other European countries.
• Germany's proposals for dealing with the crisis are still unclear, with Peruzzo suggesting that the country is moving towards considering private sector involvement and bond swaps.
• The European Central Bank (ECB) opposes any actions that would imply Greece's paper is not accepted in the refinancing framework, which could have significant implications for the banking sector.
• The market is testing the funding aspect of any adjustment program, with Portugal facing a potential rollover in 2013 and Greece in 2012.
• Contagion could hit Spain, which is already facing concerns over its economy, if it doesn't provide a preemptive backstop.
• The IMF's new managing director, Christine Lagarde, will play a key role in the next week in reasserting the IMF's position and stabilizing European leaders on the need for private sector involvement.

Statistics:

• 10-year yield in Portugal has increased by at least 7 basis points in the last 24 hours.
• Portugal needs to get back into the market in the second part of 2013.
• Greece needs to get back into the market in the second part of 2012.
• 63 million euros of bonds outstanding on the market in Spain is a significant concern compared to the EU and IMF backstop.

Sources:

• Bloomberg Surveillance
• Royal Bank of Scotland
• Moody's
• European Central Bank (ECB)
• International Monetary Fund (IMF)
• Christine Lagarde