Just How Precarious The Debt Situation Is In Europe

Several weak points in the European system could trigger a series of events that would accelerate that end. The following are the most likely scenarios:

• The Italian government and Belgian caretaker government are both in precarious positions. An Italian government collapse likely would overwhelm the fail-safes the Europeans have thus far established. Belgium does not even have a government in any practical sense, making it impossible for Brussels to negotiate — much less implement — austerity measures. A financial crash in Belgium would bring the financial crisis into the Northern European core.
• Political miscalculations or opposition to more bailouts in Germany could limit financial support to Greece at a key moment. Greece is living on bailout funds and will default on its debt should the payout schedule be more than moderately interrupted. Such interruption would  trigger a financial cascade, starting in Greece and ending in the Western European banks before EU bailout programs are expanded sufficiently to handle the fallout.
• European banks suffer from a number of deep maladies that include exposure to U.S. subprime real estate, Europe’s homegrown real estate troubles, overcrediting both within and beyond the eurozone and decades of being used as slush funds by various governments. Just as a sovereign debt meltdown could trigger a banking catastrophe, a banking meltdown would trigger a sovereign debt catastrophe. Addressing this issue will be a primary topic of the Oct. 17-18 EU heads of government summit.