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“Hard Choices” for Policymakers as Europe’s Debt Crisis Flares Up … Again

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

It takes a lot these days to muscle the Mid-East or Japan off the front page, but Europe has done it with the latest chapter of its never-ending debt crisis story.

As European finance ministers began a meeting in Brussels Thursday, the focus was on Portugal, where Prime Minister Jose Socrates resigned after parliament rejected his austerity package. The political turmoil raises the prospect Portugal will need to tap the EU-IMF bailout fund, following the lead of Ireland and Greece. In response, yields on Portuguese debt widened to record levels vs. comparable German bonds.

The good news is most observers believe the EU bailout package, currently at $710 billion, will be sufficient to cover Portugal's needs, which analysts estimate may approach $100 billion, Bloomberg reports. The bad news is there's widespread concern the EU doesn't have enough money (or political will) to bail out Spain, whose debt yields also widened early Thursday after Moody's downgraded 30 of its regional banks. (See: Europe Catches Up to the Can: Spain's Downgrade Puts Crisis Back in Focus)

"It seems increasingly plausible that hard choices will need to be made at some point over the rating horizon, balancing the sovereign's incentive to support the banks with the need to protect its own balance sheet," Moody's said in explaining the downgrades. "It is, in Moody's view, increasingly likely that the sovereign will not be prepared to write all banks a blank check."

As Henry and I discuss in the accompanying video, the issue of "hard choices" is not limited to Spain and its banking system. It also speaks to the broader issue facing the EU, about whether to bail out member nations — and the banks that invested in sovereign debt -- or risk a potential collapse of the euro, something Warren Buffett told CNBC is "not unthinkable."

That said, the euro was up vs. the dollar in recent trading amid speculation both a bailout for Portugal and a rate-hike by the European Central Bank are in the offing. Meanwhile, American policymakers continue to delay making the "hard choices" about whether to continue to provide support for debt-holders at the expense of taxpayers, as well as whether to adopt austerity measures that seem to be putting a crimp on economic growth in the U.K., Greece and other places they're being tried. (See: Does The UK's Lousy Economy Prove It? Were Paul Krugman And Keynes Right?)

Policymakers both here and abroad can continue to kick the can down the road but, in the end, there's no free lunch.