As a result of low confidence in the European ability to address the situation, bond interest rates are rising as investors demand increasing risk premiums.
Increases in the interest rates from historic 2-3% rates to the now common 5-7% rates are wreaking havoc on countries from Spain to Italy. As the interest rates double, the payments on foreign debt double, and if they were 10% of government revenues before, they go to 20%, and crowd out programs, leading to widespread cutbacks and austerity programs, which lead to less service and lower employment, which lead to unhappy populations, which can leads to….
A possible ramification of this is that Governments defaulting on debt is becoming a more likely scenario. This has the consequence of undermining banks that are among the largest holders of government debt. The prospect of looming bank failures is creating a situation in Europe now where banks are increasingly unwilling to lend to other banks in overnight situations, which is leading to credit crisis worries such as were seen in the US in 2008.
Another scenario, becoming more and more widely discussed, is the possibility of some countries leaving the Euro currency, which if not managed well could have a catastrophic effect and lead to the collapse of the currency.
The economic pressures on the Euro are becoming intense, and the political will to resolve a complex financial situation seems compromised by the governance structures in place. This is already a severe storm, and a failure of the Euro currency would put everyone in extraordinarily uncharted waters.