Colin Barr

Following the money in banking, economics, and Washington

Uncharted territory in Europe

May 4, 2010: 10:52 AM ET

The rest of Southern Europe has come down with a bad case of Greek disease. The euro fell to its lowest level against the dollar in a year Tuesday, and the price of insuring against the default on the sovereign debt of other troubled European debt issuers surged.

It now costs 189,000 euros to insure 10 million euros worth of Spanish five-year debt, according to CMA. That's up from 120,000 euros at this time last month and more than double the cost at the end of 2009, when the scope of the Greek problem was just dawning on people.

Just today, the price of insuring against defaults has risen 19% for Spanish government bonds, 13% for those of Ireland and Portgual and 11% for Italy.

The surge comes just two days after the European Union and International Monetary Fund announced a three-year, $146 billion bailout package for Greece.

"Our collective effort will contribute to the stability of the euro, will benefit all of Europe and will help to promote global financial stability and a secure recovery in the global economy," the IMF said in its press release announcing the deal Sunday.

But the rout in European markets continues, because a mere bailout can't prevent a reckoning of the financial imbalances that have built up in the decade since the euro was introduced.

What's more, a growing number of people everywhere have come to the conclusion since the crisis hit that bankers spent the last decade ripping everyone else off, with the acquiescence if not outright assistance of the government.

George Friedman of the Stratfor intelligence consultancy says it is this "global crisis of legitimacy" that will prove most daunting for Europe.

In the U.S., he writes, the belated response to the financial crisis is that the politicians are now full throatedly blaming the bankers. Thus last month's Senate inquiry on subjects such as Washington Mutual and Goldman, and this week's hearings on Bear Stearns and the role of the shadow bankers.

But in Europe, there is an added layer of tension -- what Friedman calls the "growing sense that the European Union is the problem and not the solution."

If economic hardship causes the people of Europe to turn against the EU, he writes, "then we are really in uncharted territory."

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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