Now we have to worry about French banks?
The debt contagion is spreading from the Eurozone's periphery and going straight for the heart.
New worries emerged over the weekend about the stability of several large French banks, as well as Germany's willingness to keep bailing out Greece.
More than anything else, political and business leaders want to avoid the phenomenon of contagion, in which fears in one country spread to others, causing severe stress throughout the financial system, as happened in the fall of 2008. To be sure, Europe could still draw away from the precipice. That is especially true if policy makers come up with a plan to keep Greece afloat while also preventing anxiety from infecting other countries like Spain and Italy, whose huge debts and weak economies have fed worries that their borrowing has become unsustainable.
On Sunday, French government officials braced for possible ratings downgrades by Moody's Investors Service of France's three largest banks, BNP Paribas, Société Générale and Crédit Agricole, whose shares were among the biggest losers last week. The biggest banks in Europe, especially in France, hold billions of euros' worth of Greek bonds, and investors fear even a partial default by Greece would sharply diminish the value of those assets, eroding already weak capital positions.
American financial institutions, typically heavy lenders to their French counterparts, have begun to pull back on these loans, but United States banks' exposure to France remains substantial.
Will German taxpayers continue to bite the bullet and bail out the Greeks?
"The German electorate is not in the mind-set to undertake actions it sees as subsidizing less worthy nations," said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. "As a result, the government is moving in a very isolationist way to try to establish a fortress Germany that's economically secure despite the risks in its European Union partners."
On Friday, a stalwart German member of the European Central Bank, Jürgen Stark, abruptly resigned - news that would have barely merited more than a few lines in the financial pages just a few years ago. Today, it is considered a sign of frustration within Germany about the extraordinary measures being pursued to maintain stability in the euro zone, adding to the volatility in global financial markets.
The question isn't so much will Greece default but rather can the contagion be managed to prevent a collapse. At the moment, it can't be which is why there is talk of bailing out Greece again despite their failure to hit their own budget targets.
At some point, Germany and even France will balk at throwing good money after bad and some sort of arrangement will have to be made for countries like Portugal, Ireland, and probably Spain in addition to Greece, in dealing with their debt. A soft landing for all is still a possbility but it is not likely.