The Euro Crisis: How Much Worse Can It Get?

  The Euro Crisis: How Much Worse Can It Get? :With the euro staggering from one crisis to the next, the 17 euro-zone nations are facing some tough questions, but the most pressing one this week seemed to be about scheduling: is it serious enough to warrant an emergency summit meeting? Plans for a Friday gathering in Brussels were hastily rolled out on Tuesday, but when German Chancellor Angela Merkel nixed them the next day, they were just as sharply postponed. If the euro zone's leaders can't even agree when to meet, what hope is there for the euro itself?                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        With every passing day bringing ever-worse news, the leaders will doubtless be wondering how bad it can get. You could say that crisis management is the euro zone's current default mode - if the word "default" was not such a loaded term when it comes to the debts of certain embattled members of Europe's single currency. (Read how the Greek economic crisis is threatening the euro.)
Just two weeks ago, Greece narrowly passed an austerity law aimed at securing key funding and buying precious time for the embattled euro zone, which is still struggling to put together a second Greek bailout package. Yet the respite lasted only a brief moment before the euro once again tumbled into a downward spiral that shows no sign of recovering.
On Wednesday, credit-ratings agency Moody's downgraded Irish government debt to junk status, following similar downgrades for Portugal last week and Greece last year. Thanks to the growth-choking austerity demands of their bailouts, none of the three countries are expected to see a quick turnaround in their fortunes. According to analysis by Citigroup banking group, Greece's ratio of gross debt to output will have risen to 180% by 2014, while Ireland's will grow to 145% and Portugal's 135%. (See photos of the protests in Athens.)
And as much as it dominates the debate, leaving the euro zone is not an easy option. Daniel Gros, director of the Centre for European Policy Studies, a Brussels-based think tank, says that Athens might ultimately require more than € 400 billion ($ 565 billion) in official support - almost 200% of its GDP today. But if Greece were forced to abandon the euro after a messy default, its nominal GDP would likely be halved. "In that case, the Greek government's debt to its euro-zone partners would be equivalent to 400% of its GDP, very little of which would be repaid," he says. On July 11, euro zone finance ministers all but conceded that Greece is likely to default as they tried to agree a scheme to encourage private and public sector bond-holders to swap existing Greek bonds for new, longer-maturing bonds, thereby giving the country more time to pay them back.
But the Greek default they are hoping to head off is just part of the crisis that is threatening to contaminate other euro-zone members. Borrowing costs have soared for Italy and Spain - respectively the third and fourth largest economies in the euro zone - despite hasty pledges from their finance ministers to take further debt-cutting measures. (See the Top 10 Things You Didn't Know About Money.)
Italy and Spain insist that they are secure, but their economies are increasingly seen by markets as the next in a line of dominos: yields on both of their 10-year bonds are now hovering around 6%, meaning the interest rates on their debts are twice as high as those on Germany's. They are nearing the unaffordable levels that could trigger talk of default. Despite this, Spain's Finance Minister Elena Salgado insisted on Monday that Italy and Spain have "strong economies" and that there is no logic to them being affected by market instability.
The case of Italy is particularly worrisome for the euro zone: the country is a founding member of the European Union, a member of the G-8 and, by most accounts, the world's eighth biggest economy. Italian officials point to their large, diversified economy and their high savings rate as reasons to dismiss the market jitters. But not only does the country have a debt-to-GDP ratio of 120%, economic growth is anemic: In the first quarter of this year it was just 0.1%, well below the euro zone average of 0.8%. That helps explain why the odds are shortening on Italy being the next European economy to receive a bailout - literally: Irish bookmaker Paddy Power says Italy is now odds-on to be bailed out by the end of this year, along with Spain