More defaults in Europe ahead

Filed in archive risk on July 11, 2010

Will the European Union make it? Can we expect defaults and insolvencies? Plenty of danger signals around.

Der Spiegel reports that German banks are expecting the worst. They don't believe the signs of economic recovery and 60% think that the euro crisis will worsen and jeopardize economic growth. Put simply, financial institutions don't trust the euro-zone.

Indeed, the German government seems to expecting there will be more insolvencies with reports that it is working on an insolvency plan for bankrupt states. Under this plan, private investors will have to share more of the burden. They will have to take a haircut with longer repayment terms, lower interest payments or receiving less than the original value of the bonds.

The plan envisages creating a a 'Berlin Club' . Comprising the Group of 20 industrial powers, it will act as an independent, international guarantor for the debt conversion process.

There are two significant points here. The first is that the state in question would no longer have complete control of its finances. And the second is that the German government is preparing for defaults.